04 June 2013

Graham Bishop gave evidence in the House of Lords' inquiry on Genuine EMU and the Implications for the UK

The inquiry looked into whether GEMU could correct the faults that were found in the construction of the euro. It also covered i.a. competitiveness, banking union and the SSM, the ECB's asset quality review, the single resolution authority and eurobills.

Witnesses: Megan Greene, Chief Economist, Maverick Intelligence, Graham Bishop, European Affairs Specialist, and Hugo Dixon, Reuters News

[Graham's evidence - abridged]

AQR

The asset quality review, the AQR, that the ECB is going to undertake before banks come under its supervision is absolutely crucial. If the ECB wants to avoid any risk of its credibility and its monetary policy credibility in the background being tainted, it has to be quite sure that the supervision is done well. Stage one is to make sure only sound assets come in. The next question is the stress testing of the banks that have come in to make sure they are well capitalised for all reasonable circumstances and expectations. I think we are all agreed here that at that stage you do not need deposit insurance at a European level for the immediate future because the chance of any of these banks failing is quite low.

The problem with all this is when the banks are bought into the system and the asset quality review shows some duff assets, who is going to pay for the losses? This is going to be the bag, I suspect, of the national Governments. We have the banking recovery and resolution directive going through at the moment and that is exactly what will force ex-post, as it were, the creditors to take some of the burden. This is where shareholders, bondholders—is there a depositor preference? This is the debate that is surfacing very strongly.

Common Resolution System

I expect it to be more ambitious than the Franco-German proposal, if it is a proposal. That will be operational as a college system at about the same time as the SSM comes into operation... : If you want to have a new community institution called the single resolution authority, if it is going to operate through union law, you will need treaty change to set up a new institution. That is not going to happen, either quickly or for a number of reasons such as some countries might decide to have a referendum about that treaty change...

I believe that what we will see is that there is already a community institution in existence—it is called the European Commission—which will be able to operate this as the final and formal decision within the legal framework of the Meroni judgement in its power to delegate and so on. The European Commission will be the authority but it will act in exactly the same way as the Member States have agreed that the SSM will. That set of regulatory authorities will provide advice to the Commission and it will then act in accordance with the existing treaty...

If we do not have another financial crisis in the near future, the Commission acting as an existing European institution tasked with the role through the directive of being the single resolution authority, acting on advice received in the way it does with all sorts of things at the moment. That model works perfectly well. If we felt that at some stage we were running the risk of another major crisis and we wanted to beef that up, that is when we would need a treaty change to create this new institution within the European treaty, which would be called the single resolution authority...

I just see this slight possibility on the horizon that if we are going to make the banking system, particularly the big banks, much more European and we are going to have the taxable base much more European, the backstop, the supervision, the resolution, which eventually will be the SSM, are all European. Maybe some of the tax revenues of these European companies should be paid into a central European treasury.

Once we have gone to the situation where the banks have become more and more European entities, supervised, backstopped, guaranteed, and so on, a decade ahead, that is when this is a European activity. The taxes are being levied. If these banks become Societas Europae, an actual European company, then where is their home?

Eurobonds/Eurobills/DRF

I do not believe that there will be eurobonds. The term has become very emotive and to be very clear what we mean, all the eurozone Member States giving a joint and several guarantee of these bonds. If it applied to all public debt, what that would mean for Germany with their €3 trillion annual economy is they are going to guarantee €12 trillion of debt. The moment you say that, everyone says, “This is impossible”. That is Germany, and the same with France, Italy, and so on. So joint and several guarantees are implausible and the only place where it is done in the EU at the moment is the European Investment Bank, but then there are assets behind it.

So the approach for mutualisation that is being used is the ECB, which is a pro rata guarantee, and ESM, which is exactly the same approach, and that is what I think will happen with eurobills. Up to two years is a proposal I have put and I know that the Commission is looking at it very closely. Eurobills mean that up to two years, they say that if countries do not continue to meet the rules for competitiveness and so on, then you can just pull the plug on it and you go back to where you were, but after two years the guarantees run out.

The proposal for the German redemption fund argument is interesting in theory. If you can trust your neighbours and you know that it is proven beyond all doubt for the next generation, you might want to give a joint and several guarantee for 25 years for above 60 per cent of GDP but I think we are a long, long way from that. So, on the redemption fund, forget it.

The proposal that I have put... is very carefully structured to go within the constitutional courts, it has to be time-limited. Hence, two-year bills, maximum; a fund that is temporary and finishes after five years, so it is time-limited. It can be renewed of course and the volume limit must also be identified, so rules on the maximum volume. With those two safeguards, that fits absolutely within the constitutional courts’ constraints.

GEMU

The GEMU is going to be substantive and so we need to be heavily involved... The results of this banking union must be to shrink, relatively speaking, the banks of Europe. Unless we were to have a catastrophic contraction in credit, it has to go into the capital markets. That is a huge business opportunity for the City of London, which I think it is beginning to realise, but it can only get that if we are a wholehearted member of Europe. If we leave the European Union then, without a doubt, that business will go somewhere else. We do not need to discuss where it will go. It will certainly go.

Full transcript

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