EU Tussle Over Costs Threatens to Derail Bank Union Plan

EU Tussle Over Costs Threatens to Derail March Toward Bank Union
As leaders gather in Brussels for a two-day summit, French President Francois Hollande says efforts to stem the turmoil that began in 2009 could unravel if the EU fails to deliver on its promises. Photographer: Alessia Pierdomenico/Bloomberg

The French-backed effort to fast-track a European bank supervisor is running into German-led concern over potential costs as the region’s leaders tussle over putting their crisis-fighting blueprint into action.

Pressed by counterparts from France to Austria to move quickly on breaking the link between banks and governments in the euro area’s financial crisis, German Chancellor Angela Merkel demanded a “thorough” approach as the 27 European Union leaders met for talks in Brussels today.

“I’m in favor of moving forward,” French President Francois Hollande told reporters as the two-day summit began. Suggesting electoral considerations are holding Merkel back, he said Germany and France have a joint responsibility to get the euro area out of crisis and “we are almost there.”

The EU has struggled to maintain momentum on a June plan to spur investor confidence by putting the European Central Bank in charge of lenders across the euro area. Divisions have flared over the scope of the ECB’s supervisory powers and how losses would be shared.

The splits over banking may emerge as proxies for wider disagreements over EU budget rules. Spanish Premier Mariano Rajoy isn’t ready to make a request for a bailout. And a report on Greek finances, due to back Prime Minister Antonis Samaras’s bid for more time to meet austerity targets, isn’t complete.

Markets Rally

Markets have rallied on expectations Greece won’t get kicked out the euro, Spain will get the money it needs and the ECB will use its balance sheet to limit potential turmoil. Spanish 10-year bond yields fell to their lowest in six months.

Spain is at the center of the most pressing banking issue. Rajoy wants a European bailout to inject cash directly into its ailing banks, to relieve it of the burden of paying back as much as 100 billion euros ($131 billion) in bank-rescue loans. Euro leaders are battling over a June pledge to enable direct recapitalizations once a European bank supervisor is in operation, with Germany refusing to set a deadline.

“It’s not about whether it will happen a few weeks earlier or a few weeks later,” Austrian Chancellor Werner Faymann told reporters. “We shouldn’t find excuses why not to do it.”

Underscoring concern in EU countries that don’t use the euro, Swedish Prime Minister Fredrik Reinfeldt said the bank plans are “complicated” and Sweden can’t be liable “for losses or problems in other countries’ banking systems.”

Banking Obstacles

A French official, briefing reporters after a meeting between Hollande and Merkel, said agreements in principle were possible. He said Finland, Sweden and the U.K. were the biggest obstacles.

With European officials saying no decisions are likely at the summit, the draft of the statement to be issued after the meeting sidesteps how the EU plans to backstop its financial system. It dropped a pledge made after their June gathering to break a cycle of banks and countries worsening each other’s woes.

Leaders then in June made a calculated decision to start with unified bank oversight and discuss common cleanup costs later. Yet every element of the bank overhaul draws debate back to the fight over who should pay when a bank fails. The EU has already scrapped plans to centralize bank deposit insurance.

A June proposal to replace national deposit guarantees with an EU-wide scheme, billed at the time as an integral step in building a banking union, was deleted from the final version of a September paper prepared by the European Commission. That document called only for national deposit guarantee funds backed by some common rules.

Euro Budgets

Euro-area leaders don’t plan to hold a separate meeting, as they did alongside the EU summit in June. Battle lines are emerging on longer-term efforts to remake the currency union.

Merkel proposed a new European aid fund to bolster competitiveness as she highlighted disagreements over budget rules, joint borrowing and bank supervision in a pre-summit address.

Speaking to lawmakers in Berlin before heading to Brussels, Merkel laid out her vision for more economic coordination, while expressing “surprise” at negative reaction to a proposal for a watchdog with veto power over national budgets. Her vision includes a fund “limited in time and project-based” and possibly stocked by the proposed financial transaction tax, and a rejection of euro bonds.

EU Roadmap

The draft statement is silent on proposals to set up a euro-zone treasury with its own borrowing power, kicking that debate to a December summit that will set a “time-bound roadmap” for fixing the euro’s structural flaws.

The fiscal risk-sharing ideas feature in a discussion paper put out by EU President Herman Van Rompuy in consultation with ECB President Mario Draghi, European Commission President Jose Barroso and Luxembourg Prime Minister Jean-Claude Juncker, who chairs meetings of euro finance ministers.

With the promise of ECB bond buying promising to limit the damage political divisions may cause, in addition to the 500 billion-euro rescue fund, “the institutional challenge facing the region is significantly less than it might appear at first blush,” David Mackie, JPMorgan Chase & Co.’s London-based chief European economist, wrote in a note today.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE