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Jan 7, 2013 ||
Megan Greene ||
The Eurogroup stayed up once again in mid-December until the wee hours of the morning to find agreement on some of the details to establish a Single Supervisory Mechanism (SSM) in the eurozone. That an agreement was found at all has been met with euphoria by some investors and analysts. While some shape was provided on what exactly this SSM might look like and what it might supervise, a lot of details are still needed.
What’s more, the SSM is the first and least contentious part of a banking union. The other steps – bank resolution and deposit guarantee schemes – are where the Germans and other core countries really start digging in their heels in opposition to a banking union and further integration.
European finance ministers agreed on a few details for the SSM. Among these details are:
It is unclear whether this would be enough for the SSM to be effective. Had the SSM existed a few years ago, for example, the Spanish cajas still would have sunk the sovereign as they would have been overseen by the national supervisor. Banking crises rarely start in the biggest banks, after all.
We now have a little more detail on how exactly the SSM will be embedded within the ECB, but more details still need to be hashed out. How will the new supervisory board differ from the mediation panel, for example? It seems plausible they could be comprised of exactly the same people. And how exactly will the ECB manage to separate its monetary policy and supervisory responsibilities? While finance ministers at the last Eurogroup agreed this should be the case, even that is questionable. After all, the U.K. separated its monetary policy and supervisory roles and is now in the process of trying to combine them.
German Chancellor Angela Merkel has dragged her feet every step of the way so far in shifting towards a banking union for the Eurozone. Most analysts assumed Merkel was simply trying to push off the controversial banking union until after the German elections in September 2013. But in reality Germany – and other core countries such as the Netherlands and Finland – are probably not interested in ever taking the steps necessary to create an effective banking union.
The main objective of a banking union is to break the negative feedback loop between banks and sovereigns in the Eurozone. The lines between private and public sector debt have been blurred in many of Europe’s weaker countries. In Ireland for example, bank debt was foisted onto the state’s balance sheet and sank the sovereign. In Greece, public debt was picked up by domestic banks, only to be significantly written down, necessitating widespread bank recapitalizations.
In order to break this nexus between banks and their sovereigns, systemically important banks must be recapitalized while their non-systemically important counterparts are liquidated.
In order to be able to recapitalize Europe’s systemically-important banks, a body with very deep pockets must be established. To generate enough funds, Eurozone countries would have to pool tax revenues. An effective banking resolution scheme must therefore involve some fiscal union.
Just having the funds is not enough, however. This body must also have the authority to use the funds. The old adage “No taxation without representation” applies here. This body must therefore be embedded within a democratic institution, which requires some political union.
Recent discourse out of European capitals and Brussels indicates that Eurozone policymakers are generally in favor of steps towards further fiscal and political integration in theory. What they disagree on is how exactly this is to come about.
In particular, Germany and some other core countries such as Finland insist that fiscal and political union only come about as part of a deliberate process that starts with the weaker countries jumping through a series of hoops to prove they are fiscally responsible. Setting up a banking union now would require skipping this first step towards fiscal and political union, for which there is currently no political appetite in the core countries.
The ECB has indicated that policymakers must come up with a plan for a banking and fiscal union, and then the ECB will step in with unconventional measures to bridge the gap while that plan is implemented. The best we can hope for is that policymakers continue to pay lip service to a banking union, and that the ECB pretends not to register the cognitive dissonance within the Eurozone on this issue. This could buy time, but it is not a solution. The risk is that infighting on a banking union in the common currency area will cause investors to lose faith in policymakers’ ability to draw a line under this crisis, threatening the existence of the euro.
Megan Greene is is Chief Economist at Maverick Intelligence, a columnist with Bloomberg View, a senior fellow with the Atlantic Council and a member of the REeCE Advisory Board at PriceWaterhouse Coopers.
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