Only two years ago, a fiscal capacity for the euro was a purely academic endeavour. Last night, after 11h of negotiations, we turned it into reality in the form of a budgetary instrument for the euro area - the so-called BICC. In December 2018, we launched the BICC. Last night, the BICC has finally landed. We have a new pillar in the foundations supporting the euro.
At about midnight, ministers agreed on all the critical elements of governance and financing, which make BICC an innovative tool, different from other EU funds. I am now in a position to give an overall picture of how it will work.
Let me go into some detail.
The governance of BICC is quite simple: the euro area governments set the direction of travel and the Commission will implement and manage the instrument.
A discussion on strategic priorities by the Eurosummit and Eurogroup will kick-start the cycle for selecting projects eligible for BICC financing. A strengthened Euro Area Recommendation will then follow, setting out the strategic priorities. Let me tell you why I say strengthened Euro Area Recommendation. This is because, from now on, there will be funds attached to this exercise.
Member States will submit proposals of packages of reforms and investments in Spring each year, together with their national reform programmes. This is coherent with the European Semester and the planning for national budgets.
The Eurogroup will be involved in assessing these packages, based on Commission feedback, and before the approval by the college. This will take into account the Euro Area Recommendation, and the Country Specific Recommendations. This is all consistent and connected.
We will include participating ERM II Member States in our meetings on the BICC, and - to the largest extent possible - we will consider their views.
Let me move to the financing elements, which as you know tends to complicate discussions. Yesterday was no different. As a starting point, we expect the BICC to make use of the euro area share of the financial envelope originally proposed by the Commission for the Reform Delivery Tool. Leaders will decide the amount in the context of the EU budget, so no surprises here.
On top of that, to provide scope to go beyond this envelope, we will introduce a so-called enabling clause in the relevant Regulation. This will cater for the possibility of Member States providing additional financing in the future.
To do so, we will need an Inter-Governmental Agreement - an IGA. This mention is not the end of the issue but it could be a new beginning in terms of resources. Our deputies will continue discussions on the need, on the modalities and content, and the size of the IGA. The EWG will submit a report to the Eurogroup in time to allow for a final decision in the context of the EU budget negotiations.
We also agreed on the distribution of the BICC funds. The criteria used to distribute at least 80% of BICC funds per Member State will be the population and the inverse of GDP per capita. In other words, we take into account the size of a country measured by the number of citizens, and there is a bias towards countries where convergence needs are greatest. But this is not a cohesion fund. It is an instrument for all members of the euro area. Each and every Member State will receive funding - even the wealthiest Member States get back at least 70% of what they put in.
Another key difference between BICC and other EU budget instruments is flexibility. We can use up to 20% of the funds more freely to react to country specific challenges through ambitious packages of reforms and investments.
Countries will have to put skin in the game when it comes to financing. They will have to co-finance 25% of their selected projects.
In case of severe economic circumstances, we would accept to cut this national co-financing requirement in half. That would protect investment when we need it the most.
And finally, we agreed on a separate standalone instrument for countries that have not yet adopted the euro. This is the Convergence and Reform Instrument. I will include a reference to this in my letter to President Tusk to inform discussion on the EU Budget.
We also agreed to define appropriate arrangements for non-euro area Member States not participating in the BICC. This should take the form of a dedicated instrument or a financial arrangement to address their full financial liability towards BICC.
I hope you had a good night sleep to assimilate all this information. But bear with me a bit longer as there were other topics on the agenda earlier yesterday.
We started with our regular Banking union discussion. Andrea Enria informed us on the execution of the SSM’s supervisory tasks and main challenges. Elke Koenig debriefed us on the SRB's ongoing activities and challenges.
We discussed Euro Area banks’ Brexit preparedness. Ministers heard that these banks are prepared - to the extent possible - for all scenarios, including a “no-deal” Brexit.
The profitability outlook of banks remains a key concern. Further changes to business models should be encouraged, where needed. Consolidation should also play a part.
Our next rendez-vous with Andrea and Elke on these matters is in April, I’m sure a lot will happen until then and we will come back to these issues timely.
We then had a thematic discussion on competitiveness. The Commission's analysis shows how demand-side factors have driven diverging competitiveness trends and external imbalances within the euro area. Going forward, factors linked to technological changes or trade shocks could play a significantly stronger role. We need to build a common understanding of these challenges in the Eurogroup, particularly now, that we will set the strategic priorities for reform and investment under the BICC.
We also prepared the upcoming international meetings in Washington. We reaffirm our longstanding commitment to market-determined exchange rates that reflect underlying economic fundamentals. That used to go without saying, but nowadays Europe needs to say it loud and clear.
We also discussed Portugal’s post-programme surveillance. The institutions debriefed us of the main findings of their mission.
We welcomed the good economic and fiscal performance of Portugal. Going forward, the continuation of a responsible fiscal policy and of reform efforts remains of utmost importance.
Perhaps the most timely of our discussions was the current economic situation. While the euro area continues to grow with record levels of employment, there is a slowdown at play and there are mounting risks to the outlook, one of the major risks being precisely Brexit. This is why we have been discussing the evolution of the economy in nearly every meeting.
This time our focus was on the implications for the year ahead. In the coming months, we will be dealing with draft budget plans and Euro Area Recommendations for 2020, so it is important to take stock of our overall policy stance.
We agreed on the importance of avoiding pro-cyclicality in the euro area: if there is a more marked downturn, we should not tighten our policies and make it worse. Where possible, fiscal stance should be more accommodative if downward risks materialise.
Several Member States identified reforms and investment in Research and Development and on Climate as priorities. At the same time, Member States with high public debt levels must not undermine prudent fiscal policies.
Let me conclude with the ECB, which is seeing some changes at the top.
The Eurogroup supports the candidature of Fabio Panetta to become member of the ECB Executive Board, and succeed Benoit Coeuré whose mandate expires end of the year, as you know. This will now follow the normal appointment procedure.
Ms Sabine Lautenschläger's resignation last month left another vacancy in the ECB Executive Board. So we launched a process to replace her. I invited member states to put forward their candidates until 24 October so that we can select one already in the next meeting in November. 2020 may be the beginning of a new cycle at the ECB with all these changes at the top.
It was Mario Draghi’s last Eurogroup meeting. It is hard to overstate his role in shaping the euro we have today. Ministers paid tribute to his legacy.
The same for Pierre. After 7 years of Eurogroup participation, not only as a Commissioner but also as France’s finance minister, he left his mark in the euro and in the Eurogroup with his good judgment in defending our single currency. Thank you Pierre and thank you all.