EEA implications of the recent ‘inner dynamics’ of the EU

Ever since 1995, the substance of the EEA has grown enormously, altogether with some 7,000-plus EU acts or decisions or recommendations

157 Joint Press Statement, 14^th EU-Ukraine Summit, 16691/10, PRESSE 312.

158 Communication from the Commission to the Council and the European Parliament, “Wider Europe – Neighbourhood: A New Framework for Relation with our Eastern and Southern Neighbours”, COM(2003) 104 final, p. 4.

159 Hillion (2011, p. 11).

with ‘EEA relevance’ included in annexes. Despite three treaty changes, the scope of the internal market treaty rules has remained practically the same.

Since the financial crisis, a renewed ‘deepening’ of EU economic integration can be observed, which goes beyond previous developments in the field of the internal market. We refer to the on-going attempts of the EU, de-facto led by the eurozone, to build up a more coherent and effective Economic Union, underpinning the monetary union, but at the same time improving the internal market for financial services and its proper functioning.

Indeed, for a while (say, between late 2008 and spring 2011), the EU response to regulatory gaps and failures as well as the neglect of financial stability (giving rise to systemic risks via contagion) consisted of the strengthening of the (prudential) regulation of financial markets whilst extending rules and supervision to market players and activities thus far having remained unregulated (such as derivatives without a counterparty, credit rating agencies, equity and hedge funds managers, corporate governance of banks and bonuses, etc.). New EU institutions were set up such as EU agencies (called Authorities) for supervision of banks (EBA), insurance and securities as well as a European Systemic Risk Board (ESRB).

The new agencies represent a modest degree of centralisation, with some marginal power to decide in case of conflicts between national supervisors.

This has proven difficult to digest for the EEA-3. Indeed, Norway and Iceland argue that this set-up generates significant constitutional problems for them. When this study was concluded, the EU and the EEA EFTA states had still not resolved the participation of the EEA-3 in the EBA. In any event, Liechtenstein seems ready to accept the new architecture for supervision of banks, insurance companies and securities firms. The ESRB probably does not pose a fundamental problem as it remains an advisory organ with analytical, reporting and (soft) warning duties. On the contrary, the ESRB can be regarded as an improvement of the governance of EMU and the EU-27-wide economic policy coordination under Art. 121 TFEU, which can only benefit the EEA-3 as well.

A tougher challenge appeared with the debates on an effective EU bank resolution regime, possibly with an EU deposit guarantee system (that is, a centralisation compared to mere EU regulation of national systems) as well. For bank resolution to be effective, it needs to be capable of rescuing or splitting up (in good and ‘bad’) banks, and in particular those operating transnationally and/or otherwise posing dangers of

contagion.¹⁶⁰ In turn, for credibility and readiness, this requires EU bank rescue funds (not to be confused with the European Stability Mechanism or ESM, which is meant for sovereign risks of eurozone countries), which do not exist and for which there is, as yet, no legal basis. Stronger yet, such resolution has traditionally been reserved for national treasuries, backed up by ‘national fiscal capacity’, in other words by national taxpayers, a capacity that the EU level does not have. Moreover, it opens the possibility that EU authorities and not national ones would decide to seize control of a failing bank, a highly sensitive issue. Such centralisation sits uncomfortably with the EEA approach, if it can be made compatible at all. One can have endless conversations about what ‘sovereignty’ is and is not, especially given today’s profound economic interdependence, but it is exceedingly hard to argue credibly that the ultimate sacrifice of national control over banks when failure is imminent, does not undermine a core principle of the EEA Agreement (two-pillar structure). Therefore, if it would turn out that the Single Supervisory Mechanism (SSM) would apply EU-wide over the entire internal market – the economically sound position – EEA participation in the ECB bank supervisor, in one form or another, would be a ‘must’.

In the course of 2012, this debate intensified in the light of the sovereign debt crisis in the eurozone. The upshot is likely to be an outcome that renders it even more difficult for EEA-3 countries to make it compatible with the two-pillar system.¹⁶¹ The newest proposals have

160 For example, a domestic bank which maintains a portfolio of sovereign bonds, some of which might be risky, or which has extended its investments to risky ventures in other EU countries during a ‘bubble’.

161 The central problem in this crisis is the vicious interaction between weak banks and weak sovereigns in the euro area. It looks like a throttling embrace. Many banks in the relatively unproblematic countries of the eurozone hold portfolios of sovereign bonds from problematic countries in the same eurozone (partly, as their higher risk ensures higher interest rates earnings). And they cannot be sold for a good price. The upshot is that the weakness of such banks is a direct function of the probability of debt restructuring of the weak eurozone countries. In the extreme, one may say that Greece’s debt restructuring cannot be pursued, although it would be rational, simply because such banks (e.g. in France, Germany and other euro countries) would lose enormously. A fortiori, this is true for Spanish or Italian banks, not to speak of Greek banks loaded with Greek bonds. With the obligation of strengthening own bank capital under new rules beginning in 2013, deleveraging is pursued vigorously by banks, which further increases the anxiety

become known as the ‘banking union’. The ‘banking union’ is not a eurozone but an EU proposal, consisting of three closely related elements:

i) common, centralised supervision of all (6,000-plus) banks in the EU, with national supervisors in a subordinate role – this goes much further than the EBA; ii) a single EU bank resolution authority and iii) an EU-wide deposit insurance system, pre-empting bank runs and reducing savings or capital flight between EU countries, whilst yielding bank-paid EU funds over time for bank resolution. The coherence of these proposals makes them credible, but at the same time, quite radical for some EU countries (mostly, outside the eurozone, albeit Germany does not favour the common deposit insurance system – yet – and e.g. France has some reservations about bank resolution). However, for the EEA-3, this is irrelevant when it comes to strategic reflection about future integration strategies. Liechtenstein will have to position itself, because if the Liechtenstein banks (and other EEA-3 banks) were not to fall under the banking union, it would mean nothing less than that the internal banking market would no longer be a single one.

The main query is whether and to what degree, two supervisory systems can be maintained without differential effects on rating, distinct effects in terms of competition and uncertainties in the case of crisis. Rescuing a bank with national state aid has proven to be a clumsy, if not unsuitable approach, yet this would be the consequence of not resorting under a common bank resolution regime, belonging to the banking union. These effects will be less problematic, the more uniform the so-called common supervisory rule book – which is being written by the EBA at the moment – will be.

There is an even more grandiose ‘vision’ pronounced by Council President Herman Van Rompuy: the banking union would have to be regarded as one of four ‘unions’ together completing a new and effective EMU, or better, the E of EMU. These other three unions are: a fiscal union for the eurozone (but open to other EU countries), a ‘competitiveness’

union and a ‘political union’. We think it is useful for Liechtenstein, Norway and Iceland to follow these new ideas closely as they might affect, directly or indirectly, the details, working and economic effects of the EU internal market. The problem is that it is still early days in these developments and their long-run implications are not yet clear. The four

‘unions’ add up to an admittedly elegant exposition of what it takes to have about this vicious interaction. This is the compelling background for the newest proposals set out in the text above.

an effective and credible EMU, with political legitimacy. It is conceivable that some elements of these ‘unions’ might eventually develop in ways, which might affect the EEA as it stands, but there would seem to be no immediate issue. It should be noted that the fiscal union basically exists since the so-called ‘six-pack’ decision in the autumn of 2011, the integration of national fiscal conduct in the European Semester of economic policy coordination and the recent new treaty – an intergovernmental one, ratified by eurozone and some non-euro countries, but leaning on EU rules – called the Treaty on Stability, Coordination and Governance (of 2 March 2012).

The so-called ‘competitiveness union’ or the ‘political union’ might have been communication labels, but little has been heard from them since. They would seem to entail no consequences for the EEA as far as we can now grasp.

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