Two Pending Deals

The upcoming holidays seem to have focused politicians' minds. In Washington last night, a bi-partisan Congressional budget committee convened after an October government shutdown has reached a two-year budget proposal, expected to come to a vote in both the House and the Senate before the Christmas recess. And in Brussels this morning, EU finance ministers got very close to finishing a blueprint for a Europe-wide mechanism for rescuing troubled banks directly, rather than through bail-outs to individual governments , their objective being to "minimize taxpayers' exposure to losses".

The budget proposal in Washington, authored by Republican Congressman Paul Ryan and Democratic Senator Patty Murray (the respective chairs of the House and Senate budget committees) finances the government for two years and carves out some $23 billion of debt. (As perspective, recall that total federal debt is $17 trillion.) It will thereby avoid another government shutdown on January 15, the deadline for current funding, and according to Mr. Ryan, "cuts spending in a smarter way", a reference to the further, automatic and blunt, "sequester" expenditure cuts ( totaling $63 billion and applied mostly to the Pentagon budget) that without this deal would have occurred in the new year. Taxes will not be raised, though there are some revenue measures in the proposal, including a new federal airport security fee. The announcement of the proposed deal is seen as something of a breakthrough, given years of partisan deadlock. But consider, it is nothing more than a budget document - something Congress is normally expected to devise and implement - and, moreover, a budget that doesn't even try to address the fundamental issues of entitlement spending and tax reform. (David Stockman, a former Director of the Office of Management and Budget, characterized the deal this morning on CNBC as not only kicking the proverbial can down the road, but launching the can into "low earth orbit".)  Perhaps it is all we could reasonably expect in the current environment of a highly politicized Congress and a dearth of presidential leadership. Thinking of the deal as a breakthrough merely indicates how dysfunctional Washington has become.

If the US budget deal is at very best modest, the blueprint coming out of Brussels is anything but. A joint rescue plan for eurozone banks has been talked about almost since the financial crisis began, given that it was bank failures especially in the UK, Ireland and Spain that sparked the crisis. Finance ministers have engaged in marathon talks to bring it about. Under the plan, to be finally decided next week, a new EU agency, the Single Resolution Mechanism (SRM), would be launched in 2016, and developed over ten years with the emergence of pan-European, not national, funding of up to 55 billion euros. This would be the companion agency to the Single Supervisory Mechanism (SSM) scheduled to begin next year, giving the European Central Bank the authority to monitor the activities of all major eurozone banks. The third pillar for eurozone banks, also in the planning stage, would be a joint guarantee program for depositors, replacing the current scheme operated by respective national authorities. Banking union in Europe, which some see as epochal as the launch of the euro, has barely begun, and it will be years before it is complete, especially given German caution. But a bank rescue scheme like SRM is a significant, necessary step forward; rigorous stress tests of Europe's 130 largest banks next spring will show just how necessary.