29 July 2012

Otmar Issing: Europe's political union is an idea worthy of satire

Writing for the FT, Issing asks: If trust in treaties and commitments cannot be restored, how credible are all the much more ambitious plans in the direction of political and banking union?

Forming such a union implies nothing less than the end of the nation state. A European government would have to be created with powers of taxation and public spending, a corresponding European parliament and so on. There are powerful arguments why “Europe” – whatever this means and how many countries might be included – should have this ambition. However, to base the argument for integration primarily on saving monetary union is anything but convincing. And it is more than strange when foreign politicians and experts are pressing eurozone states to give up national sovereignty, out of fear that a collapse of monetary union might have severe consequences for their economies.

Take the idea of banking union. There can hardly be any doubt that a monetary union should be accompanied by integrated financial markets. The concept of a banking union is based on European competences for bank supervision, for a resolution scheme and for deposit insurance. However, the latter two elements imply a need for a fiscal backing and therefore cannot be separated from fiscal and eventually political union. A clean-up of banking systems would have to precede the introduction of a European resolution fund and deposit insurance. Otherwise funds collected so far in national schemes would be socialised. This would not only undermine efforts by weak – to put it mildly – banks to break with the past, but would create an uproar in countries in which depositors would be effectively expropriated. This is hardly a way to foster identification with Europe.

In 2009, the EU’s "de Larosière report" recommended that the European Central Bank become the home of macro-prudential supervision (overall financial stability) but warned against giving it the power of micro-prudential supervision (individual banks’ health). Besides administrative problems, we (I was a member of the group) saw potential conflicts with the ECB’s fundamental task of monetary policy, namely price stability. “This could result in political pressure and interference, thereby jeopardising the ECB’s independence”, we wrote. Developments since the publication of the report have strengthened those concerns. Take the longer-term refinancing operations, which in effect worked as a rescue mechanism for weak banks. In such a context how credible would the ECB be as banking supervisor?

Political union is not the solution. All measures that implicitly pre-empt the establishment of political union are inconsistent and dangerous. They imply huge financial risks for a few member countries and could not only undermine honest efforts in the direction of political union, but also destroy the fundament on which such a process finally rests, namely the identification of the people with the European idea.

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