10 June 2012

Wolfgang Münchau: How to save Spain's banks – and the eurozone

In his FT column, Münchau writes that if you want to know whether any set of proposals for a European banking union is sensible, you should ask the following simple question: will it render Spain's position in the eurozone sustainable?

So what elements should a treaty on a banking union contain?

First, a deposit insurance corporation that insures the euro value of each bank deposit up to an agreed ceiling, say €50,000. The European Council should give an immediate political commitment that it would make good such losses even in the most extreme circumstances. The political commitment should be followed up with the creation of a formal deposit insurance company, perhaps implicitly backed by the European Central Bank.

Second, a recapitalisation and resolution authority that is workable and large enough. Ideally, such an authority would be completely centralised. The European Commission’s resolution proposal last week was entirely useless because it stuck to the principle that each country resolves its own banks. This is utter madness in a monetary union. Unless you separate the Spanish prime minister from his banks, you will not re-establish trust in the system.

Third, bank regulation and supervision. This is the area that will interact most with European legislation –  an annoying complication. The question to be answered by the EU summit on June 28-29 is whether the eurozone should go it alone, or whether the European Banking Authority – an EU level institution – should fulfil that role.

Fourth, following a commitment to a banking union, the European Council should agree interim measures for Spain with a commitment to applying the new institutional rules when they become active. As a first step, there is probably no alternative to an EFSF loan to the FROB. But this must be accompanied by a commitment to turn the loan into equity. That would require restructuring with the aim of shrinking the Spanish banking sector.

What about the loftier goals of a fiscal and political union? EU leaders should now focus on the banking union first because it is the most important and the most urgent element of a fiscal union. Once this is agreed, they should proceed to discuss how such a banking union can be embedded in a wider fiscal and political union. Such a process would probably take several months, and may not be ready until December. A monetary union without a full banking union is unthinkable in an internal market. But there are different plausible constructs of a wider fiscal union.

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