19 December 2013

EP President Schulz on Banking Union: "The slower and inefficient a system is, the more expensive it will be"

Banking Union

In the early hours of this morning, your Finance Ministers took decisions on the Banking Union to which I should like to turn my attention first. In the Ferreira report, adopted on Tuesday, the European Parliament again adopted a clear position on these points by an overwhelming majority, with support across all party lines. I must again present this position clearly and unambiguously, as Parliament has co-legislative powers in this regard.

Firstly, we wish the Commission to be responsible for decisions on the winding-up of banks.

Secondly, we wish the community method to provide the legal basis for the Banking Union and also for the resolution fund. We reject the idea of a further intergovernmental treaty.

Thirdly, during the transitional phase, in which a resolution fund funded by levies on banks might not yet be ready for action or perhaps might be too small for very large banks or several of them, we wish to see a solution which could involve the ESM backing the resolution fund as an insurer of last resort. As there are strict rules governing the use of public funds in the ESM, the risk of using the ESM as a residual solution in an emergency would be clear, but the advantages would be substantial and manifest: it would have an additional calming effect on the markets and would further stabilise banks, rendering it even less likely that the extreme case might arise. This reinsurance should also apply in the long term.

A Banking Union worthy of the name needs three characteristics:

First, integrated supervision, enabling the European Central Bank to supervise banks in the eurozone;

Second, a single resolution mechanism, which tackles problems identified by the ECB quickly, independently and efficiently:

• quickly in order to avoid drawing on tax revenue,
• independently in order to be credible in the eyes of the market,
• efficiently in order to avoid unnecessarily increasing the costs;

Third, reinsurance, which would be activated in an extreme emergency, if all else fails and the money in the fund is insufficient, if a systemic crisis is impending once again.

The agreements reached in the Council of Ministers this week point in a worrying direction: instead of an independent decision-making body which can act swiftly, the Member States are to retain the power of decision. The Financial Times has calculated that up to 9 bodies and 126 people would be involved in deliberations on a case. This is comparable to dealing with an emergency admission to hospital by first convening the hospital’s Board of Directors instead of giving the patient immediate treatment! The criterion is clear: if a bank cannot be wound up within a weekend in order to prevent a run on the banks, the system is too complicated. After all, we are talking about a ‘single’ resolution mechanism, not a ‘multiple’ resolution mechanism. In other words, the Commission must play a central role here, rather than untransparent bodies with untransparent interests – otherwise it will ultimately be a case of ‘Operation successful, patient dead’.

During the transitional stage, what we are heading towards instead of a single resolution fund is a fund with national money pots. That means that, at least for the next 10 years, the home countries will remain liable. Ultimately, the taxpayer will once again have to come to the rescue after all. That contradicts the fundamental idea of the Banking Union, which is that banks should come to the rescue of banks! Banks and credit institutions must answer for their own errors.

If the ECOFIN decisions become a reality, then the Banking Union will not only fail to have positive effects, it could even have negative ones:

• Additional costs to the Member States due to enforced restructuring and possible recapitalisations. This would add to the debt burden.

• There would be incentives for banks to reduce their recapitalisation requirements by reducing risks, that is, by calling in existing loans or extending fewer new loans. That would further aggravate the credit crunch – one of the greatest obstacles to economic recovery.

• The markets would lose confidence, because there would not be any solution of last resort provided by the ESM which could be activated in a crisis.

• The ECB’s credibility would suffer – although it is the very institution that enjoys the most confidence on account of its rapid and effective crisis management! Without a robust resolution mechanism, the ECB might be reluctant to reveal banks’ problems and it might be tempted to keep banks afloat by means of injections of liquidity.

• If the resolution mechanism, as proposed by ECOFIN, were made subject to national veto powers, that would further damage the transparency and legitimacy of the EU’s action. The Community must not be pushed ever further in the direction of a conflict pitting big Member States against small, and strong against weak. A fair balance of interests among all of them must remain the EU’s aim. One should also not forget that, the slower and less efficient a system is, the more expensive it will ultimately be for everybody.

If we were to implement the ECOFIN decisions on a Banking Union in this way, it would not only be a lost opportunity. It would be the biggest mistake yet in the resolution of the crisis. If the resolution mechanism for banks does not work properly, it could jeopardise financial stability. A Banking Union is something which must either be done right or not done at all.

The European Parliament will therefore not support the ECOFIN decisions in this form.

Coordination of economic policy

The crisis has brought it home to us that we need closer coordination of economic policy. But we still have a long way to go.

We must abandon the blame game. It is unacceptable for country-specific recommendations to be adopted here in the Council in the context of the Annual Growth Survey – only for polemics then to be levelled against the ‘Diktat from Brussels’ for domestic consumption. The European Semester is a good instrument for closer economic policy coordination. The European Parliament advocates a political commitment to economic policy cooperation, and at the same time deplores the lack of a social aspect to it.

The European Parliament makes full use of the powers vested in it in connection with the European Semester. During the parliamentary week we consult with national Parliaments, because we wish to increase the involvement of national Parliaments in the national phase. However, we also believe that transparency and democratic accountability at European level need to be further increased in order to foster greater acceptance and thus increase the success of the Semester.

Convergence partnerships

In the Fiscal Compact you have undertaken to ensure greater convergence of the economic policies of the Member States and to coordinate all major economic policy reforms in advance.

At the summit a year ago you stated that you wished to enter into binding agreements between Member States, the Council and the Commission in the context of the European Semester to improve the coordination of economic policy and to establish a solidarity mechanism which could provide financial support for Member States which encounter social difficulties in implementing reform programmes.

The next step is to work out the practical arrangements for this procedure. The European Parliament has three particular concerns here.

Firstly, democratic legitimacy. We would prefer to speak of convergence partnerships rather than contractual agreements. These convergence partnerships will only be democratically legitimate if the European Parliament and national Parliaments are fully involved as legislators and can exercise their scrutiny function. Convergence partnerships must therefore be integrated with the European Semester, and the European Parliament must be involved in drawing up the criteria and guidelines for convergence partnerships as a co-legislator. We take the view that the convergence guidelines should be limited to a few main reform objectives and should take account of the social dimension in a balanced manner.

The national reform programmes drawn up on the basis of these convergence guidelines must be publicly debated and adopted by national Parliaments. Only in that way can we ensure continuing democratic accountability in this process. Only in that way will acceptance by national Parliaments be achieved, which is necessary for the effective implementation of the programmes.

Unless the convergence partnerships are completely democratically legitimised, or if people even get the impression that the measures in question have been dictated by ‘Brussels’, a further serious loss of confidence in the EU may ensue. In any case, we know from experience that there is a danger that governments may blame the EU for measures which they themselves have adopted.

Secondly, solidarity. Members of the European Parliament are convinced that better coordination of economic policy must go hand in hand with a solidarity mechanism to provide a cushion against social hardship during the reform process. Such a solidarity mechanism must be part of the EU budget, but without prejudice to the upper limits of the MFF. In other words, it must be funded by new appropriations, which could come, for example, from the Member States or also from own resources such as the Financial Transaction Tax, and be assigned to a special heading in the EU budget. The European Parliament’s budgetary powers must be fully respected here. We therefore insist on being involved in all discussions about the form which the solidarity mechanism should take.

Within the European Parliament we have debated intensively how this solidarity mechanism is to be financed. Doubts have arisen as to whether it really will be adequately and promptly financed. If only the convergence partnerships are ready to be launched, without the solidarity mechanism in parallel with them, this will sabotage the propagated ‘carrot and stick’ approach. At the moment the stick is already to hand – but the carrot has yet even to be dug from the ground. Convergence partnerships without a solidarity mechanism are something which the European Parliament will resist.

Thirdly, the unity of the Union. The European Parliament recalls that all the efforts to strengthen economic and monetary union must not result in the EU being split. On the contrary, participation in closer coordination of economic policy must be open to all the Member States outside the Eurozone on a voluntary basis.

Because all these issues are still unresolved and remain controversial among you, we can understand why you have removed this topic from the conclusions and held it over until the June summit.

Full speech

Press release

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