18 September 2012

Financial World: Brussels sprouts (Graham Bishop article)

The banking union is designed to build on recent Commission proposals to strengthen regulation with harmonised capital requirements, deposit guarantees and bank resolution. Common and more integrated supervision is the first step to achieving an EU single rulebook for banks.

Once common supervision is established, it is intended the way should be open for the European Stability Mechanism (ESM) to recapitalise banks directly. That power may help explain the rush to enact this proposal. Olli Rehn, the economic and monetary affairs commissioner, told the European Parliament’s ECON committee: “We want to move without delay, and thus in two stages. At the present we are at the first stage... the Commission has been working on a legislative proposal for establishing a Single Supervisory Mechanism (SSM) for euro area banks as a matter of urgency. This will be… finalised by the end of the year. Agreement on an SSM should clear the way for the ESM to adopt, by a regular decision, a new instrument to enable the direct recapitalisation of banks.”

Who will decide whether it does “clear the way”? At all times, there will be the small question of a German veto probably exercised via a full vote of the Bundestag in difficult situations. So bail-out money will not grow on euro-trees.

Mario Draghi, ECB president, set a measured tone in Die Zeit, the German newspaper: “Those who want to go back to the past misunderstand the significance of the euro. Those who claim only a full federation can be sustainable set the bar too high. What we need is a gradual and structured effort to complete the EMU [economic and monetary union]. This would finally give the euro the stable foundations it deserves.”

So we must allow enough time as this debate is just getting under way. The outcome will reshape Europe’s financial face – and probably its political face too. All participants in EU financial markets will have to pay attention to these forces – including the ones driving democracy.

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