Why a banking union won

13th June 2012

In an interview with the Financial Times, José Manuel Barroso, president of the European commission, said all 27 EU countries should submit their big banks to a single cross-border supervisor as part of a banking union to be enacted as soon as next year. "There is now a much clearer awareness among European member states about the need to go further in terms of integration, especially in the euro area. This is one of the lessons of the crisis," he said.

Germany's Bundesbank, however, shot down proposals for a banking union, warning that eurozone liabilities cannot be shared without a clear path towards a fiscal and political union. Andreas Dombret, a board member of the Bundesbank, said such a union would be premature and unworkable as constructed. "A banking union is a sensible way forward as long as liability and control are aligned. What I mean is you don't give somebody your credit card if you don't know what he or she is going to do with it."

Though European Central Bank Vice President Vitor Constancio quickly rebutted saying a "full-fledged" unification of fiscal policies by the member countries of the euro zone isn't necessary for establishing a banking union for the euro, as the banking union wouldn't demand large amounts of taxpayer money. "I see no need for a deeper fiscal union before going deeper into the elements of a banking union," Mr. Constancio said at a press conference.

So what's the central flaw?

The Guardian says the proposals central flaw is obvious: "Germany simply isn't about to agree overnight to underwrite directly banks in Spain, Portugal and elsewhere in exchange for a mere pledge that a supercharged banking supervisor would prevent foul play."

"The danger in a banking union, as the Bundesbank was quick to say on Tuesday, is that weak banks could be stuffed with sovereign debt to lower artificially the cost of borrowing for a struggling sovereign. That's a formula for making strong members of the eurozone directly liable for the debts of the stragglers. It's wishful thinking to believe Angela Merkel could be bounced into such a commitment – or, at least, not before fiscal union, meaning central control of eurozone budgets, has happened and been seen to work, a process that would take many years."

Moreover, Barroso's plan to strip power away from national governments will eventually lead to a dramatic redistribution of wealth from richer EU countries to poorer ones, with northern Europe overwhelmingly footing the bill for bank failures in places such as Greece, Spain and Italy, writes Nile Gardiner.

"An EU banking union will do nothing to address the Eurozone crisis, but it will significantly advance the power of the Commission over nation states, and erode the ability of national parliaments to regulate their own countries' banks as they see fit, giving unprecedented powers to an EU cross-border supervisor."

Why is Barroso pushing so hard for a banking union?

Nils Pratley says maybe he believes a few components of his idea could survive German disapproval, and so convince investors that a crucial step has been taken towards fiscal union. "That, too, seems like wishful thinking."

 "One is left with the explanation that the euro authorities are running out of ideas. The surge in Spanish and Italian bond yields, to 6.74% and 6.17% respectively, says as much."

 

More on Mindful Money:

Is Greece the word? Or should Germany leave the euro?

The rise and fall of Spain’s banking rescue

Future winners of the European Championship

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