EUROPEAN INTEGRATION

Most of Europe spends most of the summer on holiday: and it seemed to me in this Olympic year that the financial crisis went on holiday during the summer as well. Now that the Olympics are over and holidays ended, the financial crisis has returned. Along with plans to try and do something about it.

There are two things on the table, both of which will inevitably lead in my view to greater European integration. The first is the European Central Bank's decision to buy in the secondary market potentially unlimited amounts of the Government bonds of Member States in the Euro. In the view of the German representatives on the bank's ruling council, this is tantamount to financing the budget deficits of Member States, which would be illegal under the bank's constitution. But the Germans were overruled. Spanish and Italian bond yields immediately fell sharply on the news.

The decision is hedged with conditions; but it brings the ECB a big step closer to being the bank of last resort that national central banks currently are, and thereby addresses one of the big structural problems with the Euro when it was set up. On the fiscal side, the fiscal pact remedies some, but not all, of the problems there. What is now required is some sort of agreement on joint Eurobonds. Member States, notably Germany, are not yet ready to take that step, but the likelihood that they eventually will has just gone up a notch or two.

The second thing is a concrete proposal from the European Commission on an EU-wide banking regulator in the form of the ECB. Its remit would in principle only cover banks in the Euro-area to start with; but since they are very few, if any banks, that are big, operate within the EU yet are outside the Euro area, it effectively covers the whole of the EU. Finance Ministers are currently debating it in Cyprus, who have taken over from Denmark as EU Chairman for the second half of this year. The proposals are unlikely to stay unamended; again, though, it is highly likely that something along the lines of the Commission's proposals will be agreed at one of the upcoming summits.

With both of the above, positive proposals have benefitted from the removal of potentially negative obstacles. First, the German constitutional court ruled that the European Stability Mechanism, the permanent bail-out fund for the Euro, did not breach German law. True, there were conditions, but the principle was conceded. Secondly, in this week's Dutch election, the big winners were pro-EU parties and the big losers extremists who had called for a referendum on leaving.

European integration tends to follow a pattern. Member States say that there is no way that they will accept certain things. Time goes on. Proposals then emerge that propose exactly what has already been rejected. There is debate. But eventually the Member States agree to move forward. So it has been with the single market, cooperation on police matters and immigration, increased powers for the European Parliament, the introduction of the Euro and much else. Fiscal policy and bank regulation will - in my humble opinion - follow in due course, and in the same way.

Walter Blotscher