The European Council meeting of 23/24 June was relatively uneventful as all the fireworks had taken place in the preceding two weeks when decisions were taken on the ESM’s ability to undertake direct bank recapitalisation and a common position was reached by Council on the Bank Recovery and Resolution Directive (BRRD). Moreover, only the most formal details remain to be settled for the Single Supervisory Mechanism (SSM). So the agenda of the meeting seemed rather unambitious but its significance of the event will reflect the behind-the-scenes struggle over the exact mechanics of the Single Resolution Mechanism (SRM).
Muddling through to Banking Union may now be inevitable. The euro area seems to have suddenly (and perhaps inadvertently) plunged into deep and dangerous constitutional waters. If Germany will not accept the European Commission as the Single Resolution Authority and in a way that would shut out a challenge in Karlsruhe, then the success of banking union will hinge entirely on the robustness of the Asset Quality Review (AQR) and stress tests during the 12-15 months. So the onus for any backstops/resolution will rest firmly on the existing national mechanisms/taxpayers.
Financial markets may become restive at such a lengthy delay in finding a solution that supports growth, as well as with the manifest absence of a robust process. If growth resumes as expected in the second part of 2013, then all could be well. The next 12-18 months promise to be nerve-wracking for many stakeholders in the 'European vision'.
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© Graham Bishop
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