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Financial
13 May 2013

Bloomberg editorial: Germany is wrong to delay a real banking union for Europe


In the next few weeks, the Commission is due to announce plans for a single bank resolution authority for the euro area. Germany's finance minister has long expressed doubts about this step, saying it would require changes to European treaties, and has opposed the pooling of taxpayer liabilities.

Schäuble isn’t as obstinate as he is often made out to be. He is showing a newfound flexibility on fiscal austerity, recognising that it can be taken too far. And his doubts about a full EU banking union aren’t unreasonable: A true union is a big step, and in an ideal world he would be right that Europe should move cautiously. Sadly, this isn’t an ideal world. Europe is trapped in a severe recession, and its financial sector is fragile. The EU can’t afford to take its time.

An EU banking union would require three main components: a single supervisor, a single resolution authority to wind down troubled banks and a single deposit-insurance system. Governments agreed to the first part in December, when they put the European Central Bank in charge and began working on implementation. The third part, collective deposit insurance, had already been slow-tracked before Schäuble’s most recent comments. Increasingly, the second part looks ready to be shelved as well...

[In an op-ed article for the FT], Schäuble clearly states that the costs of bank restructuring, especially those arising from errors made under the previous regulatory system, shouldn’t simply be pooled. But he hasn’t said exactly how Europe should “lean on” national funds or whether cross-border transfers of any kind should be allowed. A variety of ad hoc arrangements and cost-sharing formulas might be consistent with what he has said.

Even so, this wouldn’t be a banking union, and it wouldn’t sever the link between bank failure and national insolvency. In a way, that’s the point: Schäuble’s real concern is to preserve this connection. The pooling of risk that a true banking union entails would expose German taxpayers to unknown costs stemming from financial breakdown in other countries. A banking union involves fiscal transfers. German taxpayers don’t want that, and Schäuble thinks he’s looking out for their interests.

They are wrong, and so is he. Europe’s crisis has made it clear that a monetary union is unacceptably dangerous without a genuine banking union. Germans have at least as much to gain as other Europeans from a euro system that contains financial crises instead of propagating them, even if the added safety comes at some (usually modest) fiscal cost.

It’s too late for the weighing of arguments and constitutional propriety that Schäuble says he wants. Germany should have thought about all this before it agreed to create the euro. Now that the single currency exists, Europe needs a full banking union to go with it, and it can’t happen too soon.

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