December 4, 2018 / 1:13 PM / 12 days ago

Breakingviews - Euro zone reform leaves crisis fault lines intact

Euro coins are seen in front of displayed flag and map of European Union in this picture illustration taken in Zenica, May 28 2015. REUTERS/Dado Ruvic

LONDON (Reuters Breakingviews) - The euro zone’s latest reform drive leaves its crisis fault lines intact. After all-night talks, the single currency’s finance ministers on Tuesday morning agreed to make sovereign bailouts smoother and share the cost of winding down banks. Yet deep opposition to sharing debt burdens means the region remains ill-prepared for economic shocks.

The election of French President Emmanuel Macron in 2017 raised hopes for deeper integration. The latest agreement shows some progress. For the most part, though, the reforms are incremental. That will help the euro zone clear up after a crisis, but not prevent one.

Take sovereign debt. The Greek debt meltdown that started in 2009 showed euro zone governments could default. That left other indebted members struggling with higher funding costs. The latest reforms make it easier for governments to borrow from the European Stability Mechanism (ESM), the zone’s common bailout fund, without having to sign up for extra reforms. Yet at the same time, the ministers said official support should be a last resort. And plans to make it easier to restructure sovereign debt will make investors more nervous about future losses.

There’s also progress on banking. The euro zone has already set up a single regulator to oversee big banks, and a resolution board to wind them down. Now finance ministers have agreed to let the ESM lend to an industry-backed fund for winding down failing lenders. That makes it less likely that national governments will be on the hook when their banks get into trouble.

However, the euro zone has made little progress on the bigger issue of setting up a common deposit insurance scheme, or reducing banks’ exposure to sovereign debt. The toxic link between banks and governments remains intact.

Lastly, take fiscal policy. Macron wanted a common euro zone budget to help weaker members through a recession. Some sort of budget is slowly emerging, but it’s pretty fuzzy. And tools that would help smooth out regional differences, like a common unemployment scheme, now look unlikely to happen.

The euro zone remains at risk of economic shocks that end up threatening the whole project. With the European Central Bank dialling back its monetary stimulus, the single currency’s crisis fault lines may be exposed again.

Breakingviews

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