14 December 2017

Financial Times: Battle for banking union hangs over the eurozone

After surging back to economic life this year, the eurozone now has grandiose ambitions for its own budget and finance minister. But the plans are unlikely to go anywhere unless the bloc’s leaders can agree on a more prosaic issue: banking union.

The five-year-old project, designed to make the continent more resilient to financial crises, has emerged as the priority for EU leaders, even as Europe’s officials put forward a detailed blueprint for wider reform. With leaders meeting in Brussels starting tonight, Donald Tusk, the EU Council president, has insisted that completion is both “possible and necessary” and the “first reality check” for whether the eurozone can be further transformed.

Economists, too, see banking union as a vital next step that will do far more to boost confidence in the single currency than many of the other reform ideas that have been mooted.

Nicolas Véron, a senior fellow at the Bruegel think-tank, said banking union was essential to breaking the “vicious circle” that joins sovereign debt crises and banks. “This was the core of the [euro area] crisis,” he said. “So leaders need to finish the job.”

Banking union describes a project to pool oversight and crisis management of eurozone banks. In its current set-up, it provides for joint supervision run out of the European Central Bank, coupled with a separate agency — the Single Resolution Board — that intervenes when banks fail.

It has long been understood that the union’s next steps would include a eurozone-wide deposit-guarantee scheme, to give customers confidence that their money would be safeguarded should a lender become insolvent.

But building such a scheme has stalled. Germany and the Netherlands first want banks to be made as safe as possible: in their view, this requires that governments do more to clean up their banks and that EU regulations be stiffened to prevent irresponsible risk-taking.

“We were supposed to build the banking union in stages — first risk reduction, then joint supervision, then a joint restructuring system, and only then common deposit insurance. But the risk-reduction part hasn’t happened yet to a sufficient degree,” said Ralph Brinkhaus, a senior MP in Angela Merkel’s CDU party.

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