Van Rompuy’s vision for Europe collides with economic reality in Italy and Greece

27th June 2012

Yet again we find ourselves looking at a Euro area that is in another crisis,although in truth this is one long crisis now that never really goes away. And yet again we are told that a summit will fix things with all sorts of promises about Euro this and that made. This time it is mostly about a form of European banking union which is supported by everyone except those who would be likely to be paying for it! Of course this too is a familiar theme and getting this proposal through would rely on the surplus nations failing to spot that this is a backdoor route to Euro bonds and fiscal union. Let us take a look at the details here.

European Council President Hermann Van Rompuy

I wish to examine part of the proposal by Mr. Van Rompuy:

A European deposit insurance scheme could introduce a European dimension to national deposit guarantee schemes for banks overseen by the European supervision. It would strengthen the credibility of the existing arrangements and serve as an important assurance that eligible deposits of all credit institutions are sufficiently insured.

Before I examine the detail let us take a step back. If we do so we see that yet again we are seeing another type of bank bailout. Not an explicit one but an implicit one which will benefit banks in the peripheral nations most of all as it will help secure their deposit base and reduce the currency flight many have suffered from. Also there is an issue with the concept of insurance here. This is supposed to happen before an event or ex ante whereas this is after the event or ex post. In other words he is trying to apply insurance after the event you are insuring against has already happened in many cases! How does that work in practice? Imagine trying to insure your car after an accident I think everyone will realise that it will be more expensive. In some cases we would be trying to insure the car when it is virtually a right-off.

So conceptually this is something of a fantasy that hopes that the surplus nations will not spot the flaws described above. The author has unwittingly given the game away by the use of the letter c and not w in the first sentence I think. The use of could rather than would is revealing to my mind.

But it does get better and I have highlighted the crucial section here:

A European resolution scheme to be primarily funded by contributions of banks could provide assistance in the application of resolution measures to banks overseen by the European supervision with the aim of orderly winding-down non-viable institutions and thereby protect tax payer funds.

So banks which in many cases do not have enough finance for their own activities are going to finance the scheme? After all European banking authorities have demanded that many need to raise more capital. Over the past 24 hours the oldest bank in Italy has illustrated this as Banca Monte dei Paschi di Siena SpA (BMPS) is going to receive 3.4 billion Euros from the Italian taxpayer via what are called Tremonti style bonds. If we look at the bailouts that Greek,Irish,Portuguese and soon Spanish banks will receive we see that ridiculous concept of them paying for a resolution scheme.

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