Eurozone banking union stumbles

The eurozone seems to have stumbled over one of the most fundamental elements of its plan to create a more integrated economic bloc. Its plan for banking union is making exceedingly slow progress.

Last week the European Commission, the executive arm of the European Union, announced its plans for a Single Resolution Mechanism for eurozone banks. The aim of the scheme is to provide a framework for dealing with banks that get into difficulties.

It is meant to complement the Single Supervisory Mechanism, due to be introduced late next year, under which the European Central Bank will take on powers to regulate eurozone banks. Although national regulators will retain control over the vast majority of the region’s 6,000 banks the ECB will supervise key institutions directly. It will also have ultimate responsibility for all institutions as the lead bank regulator.

Judging by the official statement of José Manuel Barroso, the commission president, the combination of the SRM and the SSM seems like an impressive achievement: “all the elements are on the table for a banking union to put the sector on a sounder footing, restore confidence and overcome fragmentation in financial markets.”

However, on closer inspection the drive towards integration is much less impressive than it seems.

For a start the German government has announced vociferous operation to the SRM as it stands. Wolfgang Schäuble, the German finance minister, told die Bild, a mass circulation newspaper, that the proposal was “shaky”. It was also revealed that he had written a letter to Michel Barnier, the EU commissioner for the internal market, in which the German politician had described the proposal as “very risky”.

Indeed Schäuble argued several months ago that full banking union would require treaty change in the EU. Yet eurozone officials seem to want to go ahead without making such changes.

Schäuble’s pronouncements are in line with the official view of Germany’s governing party. The Christian Democrat’s manifesto for the September election supports common supervision for large, systemically important banks but is against a common bank deposit scheme.

Germany is concerned that full banking union could leave it as the main paymaster for the region’s trouble banks. But the barriers to full banking union should not be seen as just a straightforward matter of Germany versus other European member states. There is more going on.

Wolfgang Münchau, a Financial Times columnist, has pointed out that the €60 billion (£52 billion) allocated to the European Stability Mechanism to bail out banks is “pure deception”. Evidently for every euro the ESM uses to recapitalise a bank it has to post two euros of collateral. That means it has a strong incentive not to use the fund at all.

The fundamental obstacle to achieving banking union is a lack of politics in the proper sense of the term. There is no attempt to persuade the public that such a union would be desirable. Nor is there an overt clash of interests or ideas about the merits of such a scheme. Instead the key discussions are confined to the bureaucratic corridors of Brussels and EU summits.

It is hard to think of a better example of the structural weaknesses of the eurozone. Not only is it thoroughly undemocratic but, since it evades awkward debates, it struggles to advance towards its stated goal of greater integration.

This blog post first appeared today on Fundweb.