A busy and difficult agenda on EU summit to yield modest progress on governance reform

We do not expect a significant breakthrough on EU and Euro area governance reform at this week’s EU summit. Progress in deepening Euro area risk sharing and risk reduction mechanisms to make the single currency framework more resilient continues, but the pace is slow. While those initiatives remain incomplete, the Euro area remains more vulnerable to economic slowdown and financial disruption than other jurisdictions.

While progress is being made on the reform agenda – with the Franco-German proposals agreed by Chancellor Merkel and President Macron in the form of the Meseburg accord representing an important contribution – the political context looks set to further delay and water down what are already quite modest proposals.

Distractions include: (a) trade tensions, in the context of President Trump’s recent threat to impose much higher tariffs on EU auto exports to the US; and (b) Brexit negotiations, where the current disarray within the UK government over its position on future trade relations with the EU has derailed the timetable and requires action to ensure an orderly agreement is reached.

Above all, immigration has returned as a central and divisive topic both within and between EU member states. With last weekend’s ‘immigration summit’ of 16 EU member states ahead of this week’s event having proved fruitless, tensions have increased further, bringing the Schengen agreement enabling barrier-free cross-border travel – one of the EU’s signature achievements of the past thirty years – into question.