Delay and Pray Is the European Union's Specialty
Europe's much-hyped push for a banking union turns out to have been little more than a stall tactic. Even the European Union's most die-hard apologists would have to concede that is the only achievement of the flaccid proposal offered this week.
Since mid-2012, Europe's leaders have said many times that they are on track to create an integrated financial framework and break the bank-sovereign nexus, which is the vicious circle that ensues when weak banks hold lots of their home countries' sovereign debt and both start spiraling downward together. EU lawmakers and European Central Bank President Mario Draghi have cited three core needs for a banking union: a single supervisor to oversee the euro area's largest banks; a single resolution mechanism for restructuring or closing failing banks; and a common system for deposit insurance.
Europe undoubtedly needs a unified banking system if it's going to achieve a genuine economic and monetary union. The question all along has been whether this was anything more than a fantasy. As an elaborate exercise in can-kicking, the promise of a banking union has helped buy the EU time, the importance of which shouldn't be underestimated.
Yet time is running out, at least on this particular dilatory contrivance. Even Draghi and ECB Vice President Vitor Constancio cast doubt this week on whether the EU's latest resolution proposal would work. The EU's finance ministers decided to proceed with it anyway and declare victory.
Rather than centralizing authority to seize insolvent banks within a single overseer, the plan now on the table would spread it among several bodies populated by representatives from national authorities in a process too convoluted to be feasible. The resolution mechanism would be single in name only. National governments would still be on the hook for much of the costs. The resolution authority would have only a 55 billion-euro ($75 billion) fund to work with. It would take 10 years to build up even that meager kitty, which isn't enough to handle a meltdown at even one of Europe's biggest too-big-to-fail lenders. One silver lining: At least uninsured depositors now know that they had better be careful where they bank.
Nobody should be surprised that events have turned out this way, especially not Draghi or Constancio. It always has seemed like a fool's errand to try to devise a system that would vest the power to seize failing European megabanks with a single entity. Picture what would happen if the elected leaders of France one day got a phone call from the pan-European resolution authority to inform them that, say, BNP Paribas SA was being taken over and shut -- or if the same thing happened with Germany and Deutsche Bank AG. The response would be something like: "You're going to do what? You and what army?"
The markets would have to see it to believe it would happen. It isn't credible to think it would.
Europe has returned to a state of calm after years of crisis. The danger is that someday soon another sovereign-debt meltdown will unfold, and one of the long-promised solutions won't be there. Draghi famously said in July 2012 that the ECB would do "whatever it takes to preserve the euro." Yet a lot of people forget that he included a crucial qualifier when he made that statement: "within our mandate."
The decision of how to structure the EU's resolution mechanism isn't within the ECB's mandate. That is the province of the European Parliament and the Council of the European Union, which is the EU institution that brings together member states' national governments. Draghi and his contemporaries have been saying all along that a banking union is vital to ensure financial stability in the euro area. Unless something changes drastically, Europe isn't going to have one.
(Jonathan Weil is a Bloomberg View columnist. Follow him on Twitter.)