02 September 2012

Wolfgang Münchau: My one piece of advice for Mr Draghi

Nowhere is the onset of complacency more evident than in the ongoing discussion about a banking union. I always suspected that Germany would turn out to be the stumbling block. And I was not surprised to read Wolfgang Schäuble in the Financial Times on Friday arguing that the ECB cannot conceivably supervise 6,000 banks – which the European Commission will propose next week. Michel Barnier, finance commissioner, says it makes no sense to limit a system of bank supervision to the largest banks. Northern Rock, Dexia and Bankia would all have fallen outside the remit of a central European regulator. The largest eurozone banks are much less of a problem than the countless undercapitalised regional banks run by people with no understanding of the risks they are taking. 

Germany’s public banks, savings banks and mutual banks are lobbying hard not to fall under a European system. Their business models rely on a friendly neighbourhood regulator looking the other way. If you imposed stringent controls on the German banking systems, the cosy relationship between industry and banks would be disturbed. The Germans see Mr Barnier’s proposal as an attack on their economic model.

If the German position prevails – and it may well do – the project of a banking union will have irrevocably failed. There will be something called a banking union, announced and celebrated. The EU will congratulate itself, but it will be largely irrelevant to the workings of the financial sector. The eurozone will remain a monetary union with nationally supervised and crisis-prone banks for the foreseeable future.

Even Mr Barnier’s proposal, far-reaching as it may be, will not be sufficient. A banking union requires more than just an agreement on a central regulator. It would have huge implications for national law. For as long as national insolvency and labour laws diverge, the central regulator cannot just walk in and fire directors, or close down a bank. The banking union needs to be backed by a harmonisation of commercial and labour laws as they apply to banks – or better still, it should take the banks completely out of national jurisdiction.

If I had one piece of advice for Mr Draghi, it would be this: do not accept an unlimited bond purchasing programme without an agreement on a credible banking union. The issues are not directly linked, but without a stabilisation of the financial sector, no ECB bond purchasing programme can succeed in the long run.

Full article (FT subscription required)

© Financial Times