17 June 2021

POLITICO: Germany says nein to eurozone banking safeguards

Eurozone countries on Tuesday hit pause on reform plans designed to protect savers against a future banking crisis, amid deep resistance in Berlin.

For months, deputy finance ministers have been meeting behind closed doors to agree a timebound plan to introducing a shared deposit insurance system, which would help protect savers and public money from a financial collapse.

The European Deposit Insurance Scheme would create a central cash pot financed by banks to serve as a backup if national deposit guarantee funds run empty. But the idea for the common insurance policy, first proposed in 2015, is highly controversial within Germany’s political circles.

At a closed-door meeting Tuesday, deputy finance ministers agreed negotiations should be put on ice until after September’s federal election in Germany, in the hope of reaching an agreement with the next German government by December, four EU officials told POLITICO.

Berlin refused to sanction a work plan laying out steps to create an EDIS without ensuring that banks reduce the amount of sovereign debt they have on their books — something Rome strongly opposes.

The delay means finance ministers no longer face the prospect of all-night talks when they gather in Luxembourg for this month’s Eurogroup meeting, where EU officials had expected a showdown between Germany and Italy to agree on a final work plan for a key component of the bloc’s banking union plans.

Without the insurance scheme in place, people’s deposits remain vulnerable in the next financial crisis — a threat that’s growing by the day as pandemic-hit businesses struggle to pay back their bank loans while lenders struggle to turn a profit. A tsunami of bankruptcies could push many European banks over the edge, leaving EU governments, many of which are heavily indebted due to the pandemic, with the nightmare task of handling a banking crisis.

A spokesperson for Eurogroup President Paschal Donohoe declined to comment on the outcome of Tuesday’s meeting, but said, “Although the Banking Union remains a challenging task and a sensitive policy area, the President of the Eurogroup is committed to finding consensus among all finance ministers and delivering an ambitious work plan as soon as possible.”

Germany’s election makes the negotiations particularly difficult given a deep-seated fear within many Northern countries that banks in Southern Europe are in poor health, a concern born out of the sovereign debt crisis.

Agreeing to EDIS would put the German banks and others on the hook for bailing out Southern savers. According to documents viewed by POLITICO, Berlin refused to introduce EDIS before the EU introduces fresh measures that will reduce the amount of public debt that banks buy from their sovereigns.

The relationship is known as the doom-loop, as a government default would wipe out the country’s lenders, and has only deepened since the pandemic struck.

However, some economists question the Northern European rationale. “Some governments may prefer not to do anything and to justify it by saying all banks in the south are so dangerous,” said Nicolas Véron, a senior fellow at Bruegel in Brussels. “That point may have been true five years ago, but is not that compelling now,” after Southern countries made strides in recent years to clean up bank balance sheets and reduce financial risks in the industry.

Rome is dead set against initiatives that would discourage its banks from buying up Italian state bonds, officials who took part in Tuesday’s meetings said. Doing so could push up the cost of borrowing, a dangerous scenario for Italy considering its public debt pile of over 155 percent of economic output....

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