MAKING SENSE
OF THE EUROPEAN BANKING UNION
Giuseppe Pennisi,
Università Europea di
Roma, Consiglio Nazionale dell’Economia e del Lavoro
During the last two years,
professional economic journals as well as general audience periodicals and newspapers have been flooded
with information, reports, comments and editorials dealing with the European
Banking Union (EBU). The economic literature if often written in a jargon
non-economists have difficulties to understand, let alone to appreciate. The
general audience periodicals and newspapers articles either assume that their
readers are fully familiar with the technical issues or summarize the subject
matters in a manner to make wonder why the issues had not been sorted out
during the negotiations of the Maastricht Treaty nearly twenty five years ago,
or as a part of the Protocol to
interpret the Treaty in 2005 or even just a few years ago when the Fiscal
Compact was being worked out. Students and professionals of international
relations are baffled by newspapers’ and
periodicals’ reports on the EBU negotiations.
This article does not intend
to augment the already considerable confusion on the matter, but to clarify
those two or three things that anyone dealing with European and international
affairs need to know about EBU.
The first legitimate question
is why only in June 2012 (thus over twenty years after the signature of the
Maastricht Treaty and some thirteen years after the circulation of the euro as
a legal tender), the European Council of the Heads of States and Government of
the European Union (EU) member States decided that negotiations should be
started for the creation of an EBU. In June 2012, the general assumption was
that without an effective EBU, the European Monetary and Economic Union (EMEU)
would, sooner or later, collapse. With a severe damage to the EU and to all its
citizens. Today, this assumption is at least as valid as in June 2012.
Many would rightly ask why it
had taken so long to consider EBU an essential ingredient to EMEU. The
Maastricht negotiators were certainly aware of the challenge of creating the
modern world’s first single currency held across sovereign nations without a
political union underneath. The aspirant members of the new EMEU displayed much
diversity in their levels of economic development and performance, and they
would have very different vulnerabilities to changes of economic fortune. Yet,
while the negotiators talked of the risk of such ‘asymmetric shocks’, they
accepted a model that would deny them not only the means but also the
responsibility for dealing with them at the European level. They elaborated a
set of convergence tests, believing that real approximation of the national
economies was not necessary and could be left as a long-term plan. Equally
important, they ignored the disparity between their own political systems in
handling the necessary crises, reforms and adjustments to keep the EMEU on the
same path. All were assumed to be on a par in obeying the rules of the euro,
especially in the financial sector. Little attention was paid to differences in
banking systems and regulations and in attendant surveillance and prudential
monitoring, deposit insurance and similar subjects.
Some of our readers may remember that in the
very months when the Maastricht Treaty was being negotiated, Italy was wrestling
with the difficult issues of two important Southern Banks (Banco di Sicilia and
Banco di Napoli) that were on the verge of bankruptcy. The issues were sorted
out as the Bank of Italy exercised friendly persuasion on two of the major
Italian banking ‘poles’ to acquire the
two institutions when they were about to collapse. Many economists warned that
if the Maastricht rules had been into effect, such operations would have been
forbidden. The Maastricht assumption was, and is, that within the EMEU banking
(and any other economic sector) should compete freely with neither State aid nor
intervention. The broader foundation for neglecting the implications of
diversity at Maastricht also had to do with the 1992 orthodoxy to reject
‘old-style’ Keynesianism. A failed attempt at EMU (European Monetary Union) in
the 1970s had envisaged a European Union budget of up to seven per cent of GDP
and hence a major ‘centre of economic decision-making’. But the Werner Report
of 1970 was out of ‘synch’ with the then current thinking. So the pillar of
‘economic governance’ advocated at that time by Pierre Beregovoy, the then
French Finance Minister, and by Commission President Jacques Delors was
over-ruled.
Thus, in the Maastricht
philosophy, there would be no European transfers of resources or bailouts to
rescue States in distress: no ‘automatic stabilizers ’ as found in federal States
like the USA: a stability culture could only be built bottom-up from within
member States. States would create the best environment for free market
competition, with measures based on market principles of ‘sound money, sound
finances’. Such credibility was the prime responsibility of national
governments to maintain. The Maastricht negotiators were not the first or only
ones to cede authority to ‘finance’: the de-regulated financial services sector
and the new European single market were changing Europe as they negotiated. This
was the general philosophy of the then called ‘Washington consensus’.
When the financial crisis hit
Europe in 2008, these provisions proved not enough. Current discussions of the
ECB printing money or of the creation of Euro-bonds to share the debt burden,
have been pre-emptively blocked-out. But, the ability to monitor – let alone
manage – the crisis has also been undermined. The approach that asserted that national
governments were responsible for their fiscal positions also weakened and
nearly emasculated the monitoring that would have been possible from European institutions: it led directly
to the dodgy data that Greece reported in October 2009. The EMEU has had to
stumble towards the creation of a large emergency fund to help states in
difficulty. Many EU member States felt they had no other way than breaking the
so called ‘doom loop’, in which struggling Governments take their finances
deeper into debt to save their banking systems (and the savings and current
deposits of their citizens) only to face sky high sovereign borrowing costs.
This has happened in Ireland and Cyprus in a macroscopic manners but has had an
adverse impact on several EMEU countries.
In around 2010, it was clear that in weak
European economies, such as Italy, Spain and Portugal (let alone Greece and
Cyprus), banks were increasingly unwell or unable to lend. Many are sitting on
piles od bad loans made during the real estate and financial bubble; quite a
high proportion of these loans is unlikely to be repaid. Some of these
institutions should be shut down, merge or provided with more capital, The
Governments are in no position to rescue them with only their own resources
because they themselves are struggling to meet the European Fiscal Compact
targets.
This
explains why only in June 2012 EBU was seriously in the European agenda rather
than during the Maastricht Treaty negotiations. The June 2012 also defined the
three pillars EBU should be based upon: a) the transfer of surveillance and
prudential monitoring from the national authorities to a system whereby the ECB
would have direct responsibility for some 6000 large European banks and the
others would be under the surveillance and monitoring of the national
authorities but following EBC agreed guidelines; b) the creation of a European
institution , with joint European funds, for the resolution of severe banking
crisis; c) the harmonization of the rules on deposit guarantees and may be a
joint insurance institutions.
Thus far, real
progress in the negotiations has been achieved only in the area of surveillance
and monitoring under a); the broad lines of the new system have been agreed
upon and, unless some new hurdles occur, the mechanism will be effective on the
first of January 2015. In late June 2013, some steps were made toward a
long-sought uniform approach to the resolution of severe banking crisis,
ie. b). The deal would be that shareholders and creditors (including
bondholders) would take significant losses when bank collapses but depositors
will be protected up to € 100.000 per account. Almost no progress has been made
in terms of harmonizing depositors’ insurance and/or guarantee even though the
Cyprus crisis ought to have taught that there is a major issue due to the scope
for speculative activities.
The June 2013
agreement does greatly reduce the chance that bank crises will mutate into
public finance crises (as it happened in Ireland and Cyprus) , but it is not
yet clear if payment for past mistakes like lax regulation and inadequate
surveillance would be a national or a EMEU responsibility.
A literal
interpretation of the June agreement –still to be approved by the European
Parliament and unlikely to go into effect before 2018- is that each national
Government will be responsible to deal with its own troubled banks . It is
likely that the European Commission may revive the proposal of a Pan-European Agency
which would be called to solve the banks in difficulties independently from
political interference.
The position of Germany (and of several other
countries as well as of quite a few specialists in international law) is that
such a proposal would require a change in the Maastricht Treaty with attendant
ratification by national Parliaments and in certain countries even a
referendum. This may postpone EBU for years. It is fair to say that other
international law specialists think that a ‘ authoritative interpretation’ of
the existing Treaties by, i.e., the European Council could provide sufficient
leeway- Nonetheless, as shown in the first part of this article, the Maastricht
Treaty was built on a quite different philosophy and approach.
Altogether, the road
to EBU is still long and complex. What is likely to happen in the meantime?
Most likely, the EMEU will muddle through. As it is already doing. The ECB has
just announced that will maintain a low interest rate policy – which would help
revive the economy and depreciate the euro vis-à.vis the US dollar. In
parallel, The European Commission has been easing up on the fiscal austerity
demands to the member States. This muddling through might also help construct a
long bridge to EBU.
Acronyms
EBU – European
Banking Union
ECB – European
Central Bank
EMEU – European
Monetary and Economic Union
EU - European Union
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