Europe’s leaders far from banking union

Europe’s leaders far from banking union

On September 12th, the European Parliament adopted legislation, which will allow the European Central Bank (ECB) to take on new bank supervision tasks as part of the single supervisory mechanism. This initial step towards building a banking union in Europe has been a deeply political exercise.

Other steps that political leaders have to take to turn the Eurozone into a more stable currency union are to establish a single resolution mechanism, a bank recapitalization mechanism and a common deposit protection scheme. Will European political leaders be able to move towards establishing a fully fledged banking union such as one in the U.S.? The deep conceptual differences along national political lines suggest that there is still a long way forward for the banking union in Europe.

Looking back to the period before the September legislation adoption, political leaders had a slow start in building a European banking union. Ever since the breakout of the Greek sovereign debt crisis in late 2009, officials have consistently failed to keep pace with financial markets threatening to break up the Eurozone. As the crisis gained momentum, they remained indecisive about whether it was caused by an errant behavior of member states or by a flawed institutional configuration of the Eurozone.

A turning point was the summit of June 2012 when they committed to breaking up the lethal interaction between weak banks and weak sovereigns through formation of the banking union. Yet, the summit commitments would not change the slow pace of building political consensus.

Different national political positions were clear with respect to interpretations of the June 2012 summit conclusions. On the one side, a group of countries led by Germany insisted on building banking union ‘light’, consisting only of the single supervisory mechanism for the time being and on individualization of the fiscal crisis costs. The ‘Europeanization’ of other federal functions was not agreed at the summit, nor would it necessarily happen in the future once the new supervisory role has been taken on by the ECB, according to this interpretation. On the other side, a group of countries led by France fully stood behind the idea of full federalization proposed in the Van Rompuy report and collectivization of the crisis fiscal costs. The differences related to the form would soon prove to pale in comparison to the differences related to the precise content of the banking union.

Political differences along national lines were even clearer when it came to implementing the summit conclusions. In September 2012, the European Commission’s proposal for the banking union was a minimalist version of the federalization idea proposed by the Van Rompuy report earlier in June of the same year. This was the result of Germany’s disagreement with centralization of all banking policy functions before the effectiveness of the single supervisory mechanism has been proven. Another controversy was raised by the proposal that the ECB should supervise all 6,000 banks in the Eurozone. At the insistence of Germany and other countries, the initial proposal was diluted in such way the ECB would supervise significant credit institutions, while the national authorities would supervise all other credit institutions under the overall oversight of the ECB.

The political differences observed before the legal preparations for the single supervisory mechanism do not offer much scope for optimism. The move towards the next elements of the banking union will greatly depend on whether member state governments are prepared to overcome the deep differences in interests and reach consensus about the form and content of the banking union.

It is unlikely that a foot-dragging political process will easily overcome such problems in the context of stabilized financial markets that provide little or no incentives for political action and qualitative transition towards politically divisive redistributive federal elements. It thus seems that there is still a long way forward for the banking union in Europe.

Categories: Europe, Finance

About Author