Graham Bishop's blog: April 2012 Financial Services Month in Brussels
Graham Bishop's personal overview of events in April
The European Union is still only partway through an extraordinarily testing time, and it will emerge from this period as a very different entity from the loose political and economic grouping that went into the crisis. Remarkably, when speaking to the College of the European Commissioners even the President of the European Parliament questioned the ability of the EU to survive as a community. But the core of his concern reflected the increased tendency of the Member States to make the big decisions amongst themselves as separate nation states, cutting out both Commission and Parliament. The first steps towards new Fiscal Compact Treaty epitomised this tendency but, he argued, in the end the Parliament and Commission had maintained their roles. As voters react against austerity, the string of new Governments – especially the probability of a new French President – will raise many questions about the conduct of economic policy.
The new Treaty may be changed somewhat – preferably to give it a more elegant name and perhaps including the magic word “growth” – but this author has argued forcefully that the real changes are in the agreement on the “six pack” and now “two pack”. The latter is in the final stages of negotiation and Bruegel pointed out that it is quite striking to see how the on-going discussions revolving around the two-pack and the fundamental changes it would bring to the euro area governance have been overlooked, both by the general public and by financial markets. In many ways, this will put the entire euro area into the equivalent of a permanent IMF programme – or prepare the way for a financial assistance programme if a State asks for it.
A natural implication of the closer union is that the euro area members are more likely to take an accepting view of an evolving “banking union” that reflects the oversized banking sector in the EU as a whole. Whatever the euro area wishes, the relative size of cross-border banks means that any resolution of such banks is bound to have major spill-over effects on host States. So they will demand a say in what happens – and correspondingly must contribute to the solution.
At the recent IMF Spring meeting, Managing Director Lagarde was particularly outspoken about the implications: “To break the feedback loop between sovereigns and banks, we need more risk-sharing across borders in the banking system. In the near term, a pan-euro area facility that has the capacity to take direct stakes in banks would help. Looking further ahead, monetary union needs to be supported by stronger financial integration, which our analysis suggests should be in the form of unified supervision, a single bank resolution authority with a common backstop, and a single deposit insurance fund.”
Graham Bishop