made great efforts to reduce their labour costs as an attempt to increase competitiveness4. Many experts deem these measures as needed in order to restore the competitive balance on a European level as Southern Europe will need to be equally attractive for investment when growth returns. Governments can reduce labour costs by reducing wage and/or non-wage labour cost. Another way to achieve this is to increase labour productivity. Although labour cost is an easy comparative measure it is not the only factor in the equa-tion and is not sufficient. Competition is affected by many - often interacting or even contradictory - determinants. What makes the current situation so challenging is that, on top of the complexity of this web of cofactors, the Eurozone is a single market with a single currency managed by multiple governments. Each state has its own economic climate and policy. Italy and France, for example, have to deal with soaring sovereign debt, government spending and a rigid labour market. Germany, on the other hand, has been the exception of the exponential debt explosion and endeavoured to maintain a busi-ness-friendly policy. Despite the stability provided by its fiscal rectitude the German econo-my has lost its Schwung. Many economists blame the Merkel administration’s reluctance on investing at home5. Germany retorts that giving up on its budget surplus would set a wrong precedent and give a bad example to countries like France or Greece, which they argue, still have to make a substantial amount of reforms and cuts.However, the debate has been waging from austerity to growth-policies in recent time, even if for now, the former still dominates actual policies6. Some, including the IMF, have argued that the effects of austerity have partially been worse than predicted, and not yield-ed the hoped-for results. The current conclusion is that neither of the sides can provide a

ECON IICommittee on Economic and Monetary Affairs II

chaired byFrancesco M. Delorenzi (BE)

The European Union has been largely successful at promoting and maintaining high living-standards in face of declining growth and socioeconomic challenges. Howev-er, mounting pressure from the financial crisis and its repercussions, the EU North-South competitive gap, and the rise of emerging economies puts the EU in a precar-ious position. How can the EU ensure sustainable high living standards and global competitiveness, and what measures should be taken to tackle internal disparities of competitiveness between EU Member States?

1.ABSTRACT

According to the Global Competitiveness Index1 Europe is trailing behind on the Unit-ed States and some Asian countries when it comes to overall competitiveness, infra-structure and innovation. The EU is in need of improving its competitiveness as a union but also has to consider its internal disparities. Northern Europe consistently outper-forms Southern Europe in terms of overall competitiveness. Southern economies suffer from limited product-market competition, especially in services, heavily regulated la-bour markets and inefficient public spending and taxation systems. To assure sustainable growth, Member States (MS) will have to to showcase committed discipline to fiscal pol-icies to the markets, assure banks are capitalised, and on the longer run find solutions to the North-South gap.

2.OVERVIEW

While the United States are recovering well from the crisis, - the US closed 2014 with a 5% growth, the strongest result in 11 years2 - the Euro countries endured a second hit in February 2012, slipping into recession again. The IMF has revised its baseline forecast for this year down to an unimposing 0.8% growth, and estimates the risk of a Euro zone recession as high as 40%, and the risk of deflation at almost 30%3.While the spotlight is constantly pointed at the debt/GDP ratio and the annual budget deficits – the Euro zone crisis is, admittedly, a sovereign debt crisis – it is easy to over-look the fundamental weakness of the Euro zone: some of its countries have become un-competitive. If these Member States want to solve their debt problem, they need their economies to grow and the best way to reach substantial growth is to become more competitive. However, one question is; at what cost? A commonly used index for competition is the unit labour cost. The figures show that unit labour costs in Germany have virtually not changed between 2000 and 2009. Mean-while they rose by approximately one third in the other Euro countries. After the Financial Crisis Ireland, Greece, Portugal and Spain –the countries that have suffered the most- have

1Global Competitiveness Index 2015 - Europe Top 10: http://www3.weforum.org/docs/img/WEF_GCR2014-15_Europe_Im-age.png + Global Competitiveness Report 2015: http://www3.weforum.org/docs/WEF_GlobalCompetitivenessRe-port_2014-15.pdf2Reuters - Third-quarter U.S. economic growth strongest in 11 years: http://www.reuters.com/article/2014/12/23/us-econo-my-gdp-idUSKBN0K111Y201412233The Economist - The dangers of deflation: http://www.economist.com/news/briefing/21627625-politicians-and-central-bankers-are-not-providing-world-inflation-it-needs-some 4Reuters - [Graph] Unit Labour Cost Evolution: http://cdn1.alphanow.thomsonreuters.com/wp-content/uploads/2011/10/euro_zone_unit_labour_costs.jpg5Financial Times - Investment, not the surplus, is Germany’s big problem: http://www.ft.com/intl/cms/s/0/bc17e928-3da7-11e3-9928-00144feab7de.html#axzz3PN9ZR0oi6After Austerity, What? - The Economist: http://www.economist.com/news/europe/21577084-backlash-against-eu-ropes-austerity-intensifying-after-austerity-what

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definite answer to the woes of the EU7. Regional imbalance makes it hard to tackle the Euro zone crisis. Searching for solutions on an EU level with governments representing discordant ideologies and facing different struggles at home results in slow and prudent trying-to-please-all decisions while crit-ics argue unconventional and bold actions are much needed to recover from the crisis.

3.STAKEHOLDERS

Corporate Europe and foreign investors complain about the amount of red tape in the EU. They wish a more simple and harmonious single market and expect the EU and its Member States to make the labour market more flexible and reduce the administrative burden. SMEs ask for an institutional environment where “trial and error” is made possi-ble or even stimulated. This goes beyond the typical market-liberalism calls, as especially Southern countries often suffer from extensive red tape and slow bureaucratic structures that shy away investors.Trade Unions are in general more inclined to the political left. They represent the workers and consider job security as equally or more important than economic growth. On a na-tional level they will object internal devaluation and lobby for less austerity, wealth taxa-tion and full continuation of public services in order to avoid a “social bloodbath”. Joseph Stiglitz, a nobel prize winning economist, calls the austerity measures “a disaster”. He argues that while the electorate is asking and voting for change - pointing to the French electing the Parti Socialiste and more recently the rise to power of Syriza - citizen still have to undergo austerity measures whether they like it or not as their governments are being forced to follow the European neo-liberal path. Stating that austerity is working is “akin to a medieval barber saying that a bloodletting is working, because the patient has not died yet” according to Pr. Dr. Stiglitz8. The Council of the European Union Competitiveness was created in June 2002 to re-spond to the need for a more coherent and better coordinated handling of competitive-ness-related matters on the European level. The composition of the Council depends on the items of the agenda and they meet about five or six times a year.The European Commission9 is the main European institution that can push through mea-sures needed in order to get the Euro zone back to sustained positive growth. However, its powers are limited by the nature of the European Union. The EU is neither an agglomerate of independent states, nor is it the ‘United States of Europe’. It’s somewhere in between. The Commission is entitled to the right of initiative but it is under constant scrutiny of the European Council. European leaders are not keen to give away too much sovereign power to Brussels yet they fear the backlash of introducing harsh measures at home. Besides the politics, the Commission only has 1% of the EU GDP to spend and has no real income of its own making its task vastly complicated.The Commission works via Directorates-General

or DG under the supervision of a European Commissioner and a Director-General. The following departments play a key role in this topic: Competition (COMP), Economic and Financial Affairs (ECFIN), Financial Stability, Financial Services and Capital Markets Union (FISMA), Internal Market, Industry, Entrepreneurship and SMEs (GROW), Research and In-novation (RTD), Trade (TRADE). (See Research links)

4.MAIN CONFLICTS AND CURRENT SITUATION

Mario Draghi, the president of the European Central Bank (ECB), repeatedly stated over the past months that the solution needed for the Euro zone’s stagnant economy is three-fold. He calls for decisive actions on three fronts at once. 1. a looser monetary policy, 2. faster and deeper structural reforms by national governments, and 3. a more support-ive fiscal policy.On the first, the ECB has announced it will at last use Quantitative Easing (QE) in order to get the cash to flow and stimulate a healthy inflation rate. The Bank of England and the Federal Reserve (USA) have used this form of stimulus to get their economies back on track, with great success. The ECB however was very slow on this mainly because of Germany and its Bundesbank which long opposed QE, fearing the ECB would outstretch its mandate. Additionally, QE is considered as a last-resort effort in the toolbox of the ECB, and not without criticism regarding how far it will take the Euro into deflation, and at what point it might turn toxic10. On the second we can note that the Euro zone’s periphery – Ireland, Portugal, Greece, Spain- has made a tremendous effort reforming its obsolete governments. Even France and Italy are, slowly and reluctantly, joining in. However, the effects on the local population is often severe in the short-term, and results can be slow to show11. With respect to the recent Greek elections, the continuation of this policy path shows increased difficulty.On the third little has been done, as this overlaps with a debate about increased integra-tion, which is opposed by countries such as Germany on the fears of the higher burden and risk they would have to shoulder potentially12.

7.Austerity, Pro-Cons: http://www.economicshelp.org/blog/5366/economics/austerity-pros-and-cons/8.Social Europe - Europe’s Austerity Disaster: http://www.socialeurope.eu/2014/09/europes-austerity-di-saster/9.Departments of the European Commission: http://ec.europa.eu/about/ds_en.htm10.The Perils Of A Weak Euro: http://www.spiegel.de/international/business/ecb-decision-to-weaken-eu-ro-comes-with-pluses-and-minuses-a-1015322.html11.Growth Effects of Structural Reforms in Southern Europe: http://ec.europa.eu/economy_finance/publi-cations/economic_paper/2013/pdf/ecp511_summary_en.pdf12 http://www.theguardian.com/business/2015/jan/28/bank-england-governor-attacks-eurozone-auster-ity

ECON II - Committee on Economic and Monteray Affairs II

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assets like government bonds. This cash injection lowers the cost of borrowing and boosts asset prices to support spending and get inflation back to target. If inflation looks like be-ing too high, the ECB can sell these assets to reduce the amount of money and spending in the economy. QE won’t solve the Euro zone’s economic woes on it’s own. Such a measure can only ever be the anaesthetic before the corrective surgery. Monetary expansion must therefore be tied to deeper and more far-reaching structural reforms if it is to be part of a solution to the continent’s struggles.

EU Directive on Services in the Internal MarketAdopted in 2006, the Directive on Services in the Internal Market15 had a stated goal of removing legal and administrative barriers to trade in the services sector. The origins of the Directive went back to the Lisbon European Council in 2001, where it was requested that the European Commission launch a new strategy to dismantle the remaining barriers to services in the internal market in order to release the untapped growth potential of services markets.

Europe2020Europe 2020 is the EU’s ten-year growth and jobs strategy that was launched in 201016. It was conceived to address the shortcomings of Europe’s growth model and creating the conditions for a smart, sustainable and inclusive growth; rather than merely setting a strat-egy to overcome the economic crisis. Five headline targets have been set for the EU to achieve by the end of 2020. These cover employment; research and development; climate/energy; education; social inclusion and poverty reduction.

Small Business ActIn 2008 the European Commission launched the Small Business Act17, a program intended to support the EU’s SMEs by encouraging entrepreneurship, adapt policy to SME needs, and facilitate SME’s access to finance.

Trade Deals• Canada - EU Comprehensive Economic and Trade Agreement (CETA)The recently signed trade agreement with Canada will make it easier for our enterprises to export overseas and do business in Canada18

John Maynard Keynes13, one of the most influential economists of the past century, argued that, during times of economic crisis and high unemployment rates, the self-balancing mech-anisms of the free market are too slow and that governments are in the best position to correct the state of the economy in short term by increasing investment creating a more modern infrastructure and getting people to work. The ECB disapproves, in sotto voce, of Ger-many for doing just the opposite.Opponents to Keynesian economics, such as Nobel laureate and free-market thinker Milton Friedman14, state that Keynes’ disciples have misinterpreted his ideas. While some acknowl-edge Keynes is right concerning the effectivity of government investment during an acute crisis, they consider these drastic policies inadequate, illiberal and morally wrong in better economic circumstances. they claim that government, which is by definition connected to hu-man error, mustn’t try to control the functioning of the market by intervening in the economy.If government investment is the solution then there is one big issue that needs to be dealt with: where does the money come from? In times of the Great Depression sovereign debt was not an issue making Keynesian solutions much easier. Put simply, a government could take a loan and pay its debts when growth returned. Things have changed, today many gov-ernments can hardly pay their current debts sparking the old Right vs. Left debate. Liberals and Centre-Right Conservatives prefer calculated investments, finding money by selling as-sets, cutting wasteful subsidies and slimming the government. Social-Democrats are more inclined finance these expenditures by raising taxes, more precisely by implementing a tax shift and taxing wealth, so that the strongest shoulders, who suffered less or even prospered during the crisis, carry the heavier loads. They believe in a prominent role of the government in the economic rebound. When Europe will finally manage to kickstart its economic growth it will also have to handle the ever growing competitiveness disparity on a regional level. Southern Europe is still trailing behind because of its unappealing unit labour costs and productivity. Companies in north-west Europe will benefit from a widening competitive advantage over their southern European counterparts as growth returns, a survey of executives by Roland Berger Strategy Consultants GmbH showed. The survey also suggested that Europe’s competitiveness will de-cline over the next years compared to Asia and The United States. On a global level, Europe has to keep its position as a big player in the international trading scene and position itself as an attractive region to invest.

5.LEGISLATIVE BACKGROUND

Quantitative EasingIf interest rates are very low and the Bank’s Monetary Policy Committee expects inflation to fall below the EBC’s 2% target, it can inject money directly into the economy to boost spending. This is quantitative easing. The Central Bank creates new money electronically to buy financial

ECON II - Committee on Economic and Monteray Affairs II

13.EconLib - John Maynard Keynes: http://www.econlib.org/library/Enc/bios/Keynes.html14.EconLib - Milton Friedman: http://www.econlib.org/library/Enc/bios/Friedman.html15.European Commission - Directive on services in the Internal Market : http://ec.europa.eu/internal_market/services/services-dir/index_en.htm

16.European Commission - Europe2020 in a nutshell: http://ec.europa.eu/europe2020/europe-2020-in-a-nutshell/in-dex_en.htm17.European Commission - Small Business Act - Benefits: http://ec.europa.eu/enterprise/policies/sme/small-business-act/benefits/index_en.htm18.European Commission - CETA: http://ec.europa.eu/trade/policy/in-focus/ceta/

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Cut the Tape, Frans!“there is both good news and bad news for Europe. The bad news is that over-regulation, both at the EU and national level, has prevented the economy from growing fast-er. The good news is that, by removing barriers to investment, trade, and innovation, an enormous potential can be unleashed. Releasing this potential is also consistent with the much-stated–and much less acted upon–political will to create a single market for goods and services within the European Union.” says Carlo Stagnaro of Istituto Bruno Leoni, a Milan-based think tank22. The top vice-president of the European Commission, Frans Timmermans (NL) made a clear stance on the issue of extensive regulation during his three-hour parliamentary hearing before his confirmation. He is set to change European law-making culture. He will assess current EU laws and present a plan later this year on how to improve the way the EU works. He no longer wants a Europe that dictates what kind of olive oil should be on restaurant tables and that discourages young entrepreneurs with loads of superfluous EU administration. His key job as Juncker’s second-in-command will be to cut unneces-sary laws and making the EU less bureaucratic while also making law-making more transparent. He pledges to reduce as much legislative burden as possible without scaling down on Europe’s principles.23

7.USEFUL LINKS FOR FURTHER RESEARCH

• February cover issue - Greece and the future of Europe - The Economist: http://www.econ-omist.com/news/leaders/21641200-syrizas-win-could-lead-grexit-it-should-lead-better-future-euro-go-ahead?spc=scode&spv=xm&ah=9d7f7ab945510a56fa6d37c30b6f1709

• Euro Zone Crisis Timeline - The Guardian: http://www.theguardian.com/business/interac-tive/2012/oct/17/eurozone-crisis-interactive-timeline-three-years

• The Dangers of Deflation - The Economist: http://www.economist.com/news/brief-ing/21627625-politicians-and-central-bankers-are-not-providing-world-inflation-it-needs-some

• VIDEO: What is Quantitative Easing? - Bank of England: http://www.bankofengland.co.uk/monetarypolicy/pages/qe/default.aspx

• A list of all the Departments of the Commission: http://ec.europa.eu/about/ds_en.htm

• World Economic Forum - Rebuilding Europe’s Competitiveness Report: http://www3.we-forum.org/docs/WEF_RebuildingEuropesCompetitiveness_Report_2013.pdf

• Ongoing negotiations with the U.S. over a Transatlantic Trade and Investment Pact (TTIP)The EU and the U.S. are finalising negotiations for the establishment of a free trade zone. The better trade conditions would result in multilateral economic growth and would bene-fit EU businesses. Europe’s economy would grow by €120 billion thanks to the agreement19.

6.PROSPECTS AND OUTCOMES

Whatever it takesThe European Central Bank has just fired its famed ‘bazooka’. Mario Draghi underlined his determination to go the extra mile to save the Euro zone economy by announcing the Frankfurt-based bank will purchase government bonds over the next years to stimulate the European economy. Financial markets were anticipating the introduction of Quantitative Easing (cfr. video in Research Links) for a long time, despite fierce German resistance. Many didn’t expect however that the ECB would go as far as to pump €60bn per month into the Euro zone. Libertarian critics say that with this measure, the ECB is “indirectly raising a tax on bank savings”. With the extra capital, banks will be less dependent on their clients savings, thus won’t need to give high interests on savings. If the inflation will indeed go up then saving money - money which will lose its value- at the bank won’t be beneficial anymore. Central bankers support this effect because, along with the cheaper loans, it will encourage consumer spending.In the light of the Greek elections – Which in the meantime have been won by Syriza, a radical leftist party - the ECB locked out Greece from its bond-buying program for at least six months in order to put pressure on whoever will lead the next Greek government. With the recent formation of a radical left - radical right coalition government that opposes EU deals, it is not likely that the ECB will make soon reverse that decision.

Juncker’s weapon of mass investmentThe new Commission president Jean-Claude Juncker recently announced the proposal for the European Fund for Strategic Investments (EFSI) and the expansion of the Europe-an Investment Bank (EIB) in order to boost public investment in the EU. His master plan is to insert €21 billion of seed money to leverage a total of €315 billion from Member States and private capital in order to kick-start economic growth20.His plan is quite controversial. The Royal Society, one the most respected scientific fellowships, has opposed the Commis-sion’s plan to take €16bln from the Horizon 2020 budget to finance the €21bln seed money. While Europe is trailing behind on innovation and research, EFSI is taking away a part of the meagre budget devoted to R&D. Just 7% of the EU budget is devoted to Hori-zon 2020 against almost 40% for contested farm subsidies21 and apart from the Nordic countries not a single EU Member manages to meet the European target of allocating 3% of GDP to research and development.

ECON II - Committee on Economic and Monteray Affairs II

19.European Commission - TTIP: http://ec.europa.eu/trade/policy/in-focus/ttip/20.FT - Jean-Claude Juncker to unveil €315bn EU programme21.European Budget 201222.CapX - The EU needs to reboot the Single Market23.EU Observer - Self-assured Dutch commissioner pledges to change EU culture

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ECON IICommittee on Economic and Monetary Affairs IIOpinion piece by Fatih Seyfi

Whether the heads of state and government of the European Union will develop the Eurozone from a monetary to a fiscal union, or we will have to dissolve it and return back to national currencies. Muddling through is no option anymore.

With the introduction of the Euro as a common currency for several EU member states, we can observe a change in the national economies of all member states of the Eurozone. Some member states, like Germany and the Benelux states, profited from the Euro and increased their exports; some highly profited of it at the beginning, but since the crisis started, Southern countries lost competitiveness and increased their public debt, like Greece, Spain, Portugal and Italy. One reason that Southern European countries have such a high public debt is that they cannot devalue the cur-rency to restore competitiveness. This causes lower growth and lower tax revenues in these countries

The European Union should implement a “double-strategy”. In their own interest, the Southern European countries have to make supply side po-licies to lower their labour costs, unit labour costs and non-wage labour costs in order to improve competitiveness. Although reforms should be re-alised, the EU and ECB have to see the importance of economic growth. At the moment, the only policy recommendations seem to be spending cuts and austerity, but this is pushing countries into a negative spiral of lower growth, higher unemployment and lower tax revenues. Especially the Sta-bility and Growth Pact implemented in 1999 does not allow the budget deficit to exceed 3% of the national GDP, thus impeding countries to sol-ve their economic crisis with more loans but only with cuts and austerity measures. Nevertheless, I am convinced that in times of a crisis, you have to implement exceptional measures and cannot strictly stick to treaties and

agreements. The German ex-chancellor Helmut Schmidt stated: “In a great crisis, you don’t look at the constitution.” We need a pact for economic growth and the combating of unemployment, particularly young unemployment. As the southern countries have not enough financial resources to invest in infrastructure, educati-on and culture in order to encourage the creativity and innovative strength of the society, the EU, especially its economically powerful states, have to invest in the South. Increased investments are no luxury, but the vital groceries of the civilised society. The consequence of this double-strategy would be a stronger commit-ment for the common currency of all Euro-members and the further development of the monetary union to a fiscal union. It would mean there is just one common Euro bond for all Eurozone government debt. It is possible to have the existence of Eurobonds with individual countries still setting tax and spending levels. Ho-wever, with Eurobonds, there would be greater pressure for countries to stick to limits and rules about levels of spending and borrowing as well as lower interest rates for these loans than those of other international banks, making it easier for countries to rebuild.

All in all, there are two options. The first one is the dissolution of the Eurozone and the return of all Euro-members to their national currencies in order to get competitive through devaluation. In my opinion, this would be the end of Euro-pean integration and the deterioration to a free trade zone. The second option is the further development of the Eurozone from a monetary to a fiscal union by introducing Eurobonds. Whether if you are in favour of the first or second option, governments have to fulfil their responsibility and see that muddling through is no option anymore.

Even though on paper, the piece of legislation presents as coherent and a secure pillar for the EU banks, the main concerns of the financial institutes is whether these measures will actually be effective, nevertheless if the SRM is the new restructure to be developed in order to avoid another devastating economic crises, the core question remains: is the EU ready to undertake the SRM?

On one hand, country-adjustment could attract debt deflation dynamics in the pe-riphery, dragging the entire European region into a period of economic stagnation. On the other hand, mutualisation of existing debt would be akin to selling in-surance after the fact and could reduce incentives to restore competitiveness and fiscal sustainability. Because of these important tradeoffs, dealing with the debt overhang will remain a delicate issue.

According to the ECB’s comprehensive assessment5, conducted during November 2013 and October 2014, Eurozone banks must have a 5.5% minimum threshold in order to prevent the bank from failing.Whilst Member States such as Germany, where banks have an average threshold of 8.78%, and do not need much guarantees in the case of any national bank failure - the chances of such an event to occur are relatively low-. However, countries like Portugal, that mark way below 5.5%6 - and that even re-cently had the retrieve from complete bankruptcy the country’s leading private

ECON ICommittee on Economic and Monetary Affairs I

chaired byLuisa Edveş (RO)

En route to a European Banking Union: ensuing the political agreement on a new law setting up a Single Resolution Mechanism (SRM) to deal with failing banks, what steps, if any, should the EU take to further stabilise the European banking system and its alignment with the real economy?

1.ABSTRACT

When a bank dissolves within the Europe’s Economic and Monetary area, it does not just threaten depositors and shareholders- Member States’ Banks can drag down the national governments that try to rescue them-. As a result, the European Union leaders pledged to attack this vicious circle by reinforcing a Single Resolu-tion Mechanism, after the debt crisis almost broke apart the euro bloc. They vowed to centralise bank supervision and crisis management, an effort seen as the big-gest transfer of sovereignty since the creation of the common currency. Policy makers are united in the goal of what they call the Banking Union: ending taxpayer bailouts and taking key decisions out of national hands. However their starting point represents a building block of questions that still remain unanswered: Who will decide when a bank is threaten to fail? Who will be responsible to pay for the rebuild-ing of the bank? And how will the divvy up of the losses be made?

2.OVERVIEW

On the basis of a new structural reform, the European Commission (EC) imple-mented the creation of new infrastructures within the Banking Union1- the Euro-pean Union (EU) institutions agreed to establish a Single Supervisory Mechanism (SSM)2 ran by a Supervisory Institution and a Single Resolution Mechanism (SRM)3 which includes a Single Resolution Board (SRB) and a Single Resolution Fund (SRF). Such decision emerged from the financial crisis of 20084 and the subsequent sovereign debt crisis- it became clear that, especially in a monetary union such as the euro area, problems caused by close links between public sector finances and the banking sector can easily spill over national borders and cause financial dis-tress in other EU countries. Then, it was only natural that a new system of banking supervision for the EU was in need to be created- The SSM- in order to comprise the European Central Bank (ECB) and the national supervisory authorities of the par-ticipating countries. However, in 2014, the EC determined that further cohesion was needed and therefore, to ensure the efficient resolution of failing banks with min-imal costs for taxpayers and to the real economy, the SRM was created.

1.The banking union in the European Union is the transfer of responsibility for banking policy from the national to the EU level in several countries of the European Union, initiated in 2012 as a response to the Eurozone crisis;2.The Single Supervisory Mechanism (SSM) places the European Central Bank (ECB) as the central prudential supervisor of financial institutions in the euro area and in those non-euro EU countries that choose to join the SSM;3.Single Resolution Mechanism (SRM) aims to ensure an orderly resolution of failing banks with minimal costs for taxpay-ers and to the real economy;4.The crisis of 2008: http://www.economist.com/news/schoolsbrief/21584534-effects-financial-crisis-are-still-being-felt-five-years-article 5.Find the full document here: https://www.bankingsupervision.europa.eu/ecb/pub/pdf/aggregatereportonthecomprehen-siveassessment201410.en.pdf ;6.Meaning if the European Union slipped into a two-year recession, Portugal would slip into a three-year economic contraction, read more about it here: http://blogs.wsj.com/moneybeat/2014/10/26/a-country-by-country-breakdown-of-the-stress-test-fails/ ;

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bank (Banco Espirito Santo) at the cost of 4.4 billion euros7 - would definitely benefit from such a guarantee that only the SRM can assure. But can these countries like Portugal, Greece or Cyprus afford to pay regular contributions to the ECB in their current economic situation? There is a fear that banks will not be able to find additional capital on the markets and that this will result in serious government intervention and even to a wave of mergers.

Again, we need to remember that even though it operated mostly in the same cur-rency, the EU does not operate under a fiscal union. However, a deeper fiscal inte-gration would cement a more stable monetary union in the long term . Nevertheless, one element is time sensitive: the euro area SSM currently being established should quickly be complemented by a firm and early commitment to establish a single reso-lution framework with an adequate backstop to anchor confidence in the bank-ing system. Historical experience with fiscal integration shows that effective crisis management often goes hand in hand with far-reaching long-term reforms, in-cluding introducing stronger central oversight.

• Will the divergences between national resolution rules in different Member States and corresponding administrative practices lead to the lack of a unified decision-mak-ing process?• Will the actions towards a genuine Economic and Monetary Unions be able of breaking up the negative feedback loops between sovereigns, banks and the real economy?• The uniform application of the resolution regime in the participating Member States will be enhanced as a result of it being entrusted to a central authority such as the SRM. Furthermore, will the SRM interwoven with the process of harmonisation in the field of prudential supervision?

3.STAKEHOLDERS

Recalling that the SRM wants to ensure a uniform implementation of the EU lev-el bank resolution rules and procedures in the Member States, therefore to avoid any other bank failure, at the core of the regulation, the SRM directs to provide key benefits for taxpayers, banks, deposit-holders and financial and economic stability in the entire EU9.

Firstly we have to focus our attention on the complementary relationship between the EU Bank Recovery and Resolution Directive (BRRD)10 and the SRM.

On one hand, the BRRD is a necessary step to improve efficiency and cohesion in ensuring that failing banks in the EU single market and it can be resolved in a way which preserves financial stability and minimises costs for taxpayers across the EU28. While, on the other hand, the SRM is an essential complement to the ECB-led SSM for more integrated bank oversight and crisis management in the banking union. Thus, we have the BRRD which provides uniform rules for the whole EU single market and the SRM sets out the institutional and funding architecture for ap-plying those rules in Member States participating in the banking union.Shifting our attention towards the SMR, it is really important to understand that the SRM will function in conjunction with the other main pillar of the EU Bank-ing Union, the SSM. The SRM will automatically apply to all SSM members, empha-sising the fact that the states that do not participate in the SSM cannot participate in the SRM. In the cases in which any of the member banks will fail, the mechanism will allow bank resolution to be managed effectively through a Single Resolution Board11 and a Single Resolution Fund12 - In consequence, until the recent count, the SRM will apply to all of the roughly 6,000 banks established in member states participating in the SSM-. The national resolution authorities13 will be responsible by execution of the res-olution plan, under the supervision of the SRB, meaning that the Member States will be obliged to follow directives in order to ensure effectiveness.

7The bankruptcy of the Banco Espirito Santo: http://www.dw.de/portugal-prepares-to-rescue-its-biggest-private-bank/a-17831301 ; 8A future without a fiscal union?: http://www.theguardian.com/commentisfree/2011/aug/09/eurozone-fiscal-union-eu-rope ;9Find the full proposal : here:http://ec.europa.eu/finance/general-policy/docs/banking-union/141124-implementing-reg-ulation_en.pdf ;10BRRD sets out the framework for bank recovery and resolution in the EU. It sets out some arrangements to deal with failing banks at the Member State level and arrangements to facilitate cooperation in tackling cross-border banking failures;11The Single Resolution Board (SRB) is a directive which supervises banks in the euro area and in other countries which decide to join the Banking Union;12The Single Resolution Fund (SRF) will contain contributions from all the participating member states of the SRM and will be built up over a period of eight years in order to reach a target level of at least 1% of the amount of covered deposits of all credit institutions;13National resolution authorities are closely involved in the resolution process. They would assist the Single Resolution Board in preparing its actions which would draw on their expertise and experience, for example in the form of staff ex-changes. Crucially, national authorities would be in charge of implementing the resolution decisions in line with national company and insolvency law. Member States would thus be integrated into the mechanism in the preparatory and implementation stage regarding banks in their jurisdiction;

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composition18 and discretions applied at the national level19.In consequence, the ECB will be reviewing the contributions and assessing the banks’ overall capital situation or will the EBC enter the scene every time the SRM will face concerns? Looking over the three mentioned issues, it is undoubtable that concern and doubts arise from the EU Member States over the implementation of the SRM.

• Will this lead to a better relationship between the EU Members and the ECB?• Will the implementation of the SRM the saving net of the European Union’s financial institutions at risk of failing?• Is the SRM in the position of assuring the financial security within the EU?

5.LEGISLATIVE BACKGROUND

After months of political debate, the European Commission proposed the Regu-lation on a Single Resolution Mechanism and a Single Resolution Fund on 10th July 2013 . In December 201320, the Member States part of the Euro Area accepted and entered the Intergovernmental Agreement of the SRF functioning. Further, on the 20th March 2014, the European Parliament reached a political agree-ment on the SRM and SRF, leading to several revisions of the regulations21. It was only on the 15th of April 2014 when the political agreement was approved22. Finally, the agreement will be applicable amongst the contracting parties from 1st of January 2016.The SRM regulation must also be seen as a connection with the Recovery and Reso-lution Directive for banks and certain investment firms (BRRD).However, not to be considered that the Regulation replace the BRRD which con-tinues to be necessary in providing the framework for recovery and resolution

Under most scenarios, contributions by shareholders14 and creditors15 should be sufficient to finance the resolution proposed by the SRB. If, exceptionally, additional re-sources were needed, the SRF would come into play as a last resort. However, the SRF would be only used to finance bank resolution process, and not to directly absorb any losses or recapitalise a bank.

• Will actually the contributors and the taxpayers benefit from the SRM’s decision mak-ing? • Will the SRB and the national authorities going to overlap in the creation of the reso-lution? • Do we trust that the action steps created by the SRM are what the Member States need in order to avoid bank failure?

4.MAIN CONFLICTS AND CURRENT SITUATION

Regarding the Member States position towards the SRM, Britain and Denmark want-ed to clarify whether central banks, can extend liquidity even when relying on specific government guarantee while France, Italy, Sweden and Portugal asked for assurances that state guarantees can also be extended to help a struggling bank issue bonds with-out requiring bail-in. This meaning that the Member States still have some reserves regarding the assurance that both the EU and the ECB are giving them in order to acquire their trust.On 26th of September 2014, Ignazio Angeloni, member of the Supervisory Board of the ECB gave a speech at the Conference on “The New Financial Regulatory System: Chal-lenges and Consequences for the Financial Sector’’ in Venice. In his speech16 he argued that even though better rules are necessary in the banking supervisory system, is yet hard to restore trust in the ethical behaviour of the financial sector, especially after the economical crises. Therefore, in order to maintain a healthy Single Resolution Mechanism, the financial sector in each of the Member States countries have to improve as well. How can the SRM, together with the ECB gain the trust of the national banks? What improvements should the Economic and Monetary Affairs Committee should further conduct in order to develop the financial system?

Two months later on the 18th of November 2014, another issue was arisen by Sabine Lautenschläger, member of the Executive Board of the ECB, when pointing out the SSM’s contribution calculations and transitional adjustments17. She emphasised the strong di-vergences between individual banks, which recall a re-examination of their balance sheet

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14.An individual, group, or organization that owns one or more shares;15.A creditor is a person, bank, or other enterprise that has lent money or extended credit to another party;16.Find full speech here: https://www.bankingsupervision.europa.eu/press/speeches/date/2014/html/se140926.en.html 17.Find full speech here: https://www.bankingsupervision.europa.eu/press/speeches/date/2014/html/se141118.en.html ;18.Bank-specific drivers;19.Country specific drivers;20.Please read the press release here: http://europa.eu/rapid/press-release_IP-13-674_en.htm;21.Read the technical briefing carefuly here: http://ec.europa.eu/finance/general-policy/docs/bank-ing-union/140328-technical-briefing_en.pdf;22.See the texts adopted here: http://www.europarl.europa.eu/sides/getDoc.do?type=TA&language=EN&refer-ence=P7-TA-2014-0341;

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7.USEFUL LINKS FOR FURTHER RESEARCH

What is the Banking Union?: https://www.youtube.com/watch?v=vo3SWSpHwzY

The Banking Union in practice: https://www.youtube.com/watch?v=sLFjz7u5e-0o&src_vid=vo3SWSpHwzY&feature=iv&annotation_id=annotation_2610833651

EU Banking Union Reference Guide to Key Dates, Milestones: http://www.bloomberg.com/news/2014-08-28/eu-banking-union-reference-guide-to-key-dates-coming-milestones.html

The press release on the Single Resolution Mechanism: http://italia2014.eu/me-dia/1379/presse_release_14072014.pdf

Single Resolution Mechanism and the Single Resolution Fund: http://www.fresh-fields.com/uploadedFiles/SiteWide/Knowledge/briefing-banking-union-srm-and-srf.pdf

The European Commission’s Proposals for a Single Supervisory Mechanism: Racing Towards Banking Union in the EU? http://www.whitecase.com/files/Publica-tion/2ba8a223-55b7-46ff-9948-d664e7618ef3/Presentation/PublicationAttachment/baecadee-55ea-4c18-a4f4-da85e851b498/alert-european-commission-proposals.pdf

EBF Positioning on the Principles underlying the Single Resolution Mechanism: http://www.ebf-fbe.eu/uploads/EBF%20Position%20on%20Single%20Resolution%20Mechanism%20v7%20final.pdf

Position Paper of Rabobank on the Single Resolution Mechanism: https://www.rabobank.com/en/images/20131204-PP-Single-Resolution-Mechanism.pdf

Official release regarding the mutualisation of contributions to the Single Res-olution Fund: http://europa.eu/rapid/press-release_STATEMENT-14-165_en.htm?lo-cale=en

Regulation of the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU): http://eur-lex.europa.eu/le-gal-content/EN/TXT/PDF/?uri=CELEX:32014R0806&from=en

Will the SRM operation work?: http://www.skadden.com/eu-banking-union-politi-cal-agreement-reached-on-single-resolution-mechanism

The confidence that the SRM can achieve within the European Bank: http://insights.skadden.com/financial-regulation/eu-banking-union-will-new-regulato-ry-framework-restore-confidence-european-ban

within the EU, in particular for those Member States that are not part of the Banking Union. Apart from the aspect of recovery plans, the SRM supports the BRRD through financial arrangements based on contributions from the banking industry. Therefore, it should be noted that national laws and regulations implementing the BRRD include those related to the establishment of national resolution funds and will apply as from 1st January 2015. The contracting parties to the Agreement have committed to transfer to the SRF the contribution they raised by virtue of na-tional law implementing the BRRD.It is clearly stated that the banks need to make contributions to the SRF in the follow-ing eight years so that the EUB could assure the protection of all the bank deposits in the Banking Union.

• Is the EU ready for the implementation of the new regulations taking into consider-ation that it was only approved in April?• Does the connection between BRRD and SRM bring any value to the Banking sys-tem? • Taking in consideration the current proposal, what could be improved, added and further developed?

6.PROSPECTS AND OUTCOMES

Even with the best of bank supervisors, crises in the banking sector will occur. Most Member States did not have a well-elaborated crisis management strategy when the financial crisis hit Europe. The EU needs to be better prepared for dealing with future crises.While the EU level already defines national rules for the financial sector to a large extent, substantial differences persist. Such differences in national regulation hamper effective supervision at the European level. More harmonised rules therefore need to be put in place to facilitate the task of the SSM and hence improve the quality of its supervision. In EU jargon, such harmonisation takes the form of a single rulebook.What will happen if any of the banks will fail before reaching the eight-year goal set? How will the countries, which already suffered from bank failure, contribute to the SRM? Does the SRM act like a safety net for them?

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