EU Leaders to Affirm Bank Union Strategy to Break Crisis Cycle

European leaders next week will affirm their aim to break the crisis-causing links between banks and sovereign debt by centralizing bank oversight, while leaving open how to resolve German reluctance on cost-sharing.

“In the short run, the key priority is to complete the banking union” in line with previous commitments, according to draft conclusions for the June 27-28 Brussels summit. Common euro-area bank supervision, which the European Central Bank will take up next year, needs to be accompanied by a common system for dealing with failing banks that can prop them up or shut them down as needed, according to the document obtained by Bloomberg News.

This single resolution mechanism “should include appropriate funding arrangements, based on contributions by the financial sector itself, and an appropriate and effective backstop,” the June 17 draft states. EU leaders look forward to a forthcoming European Commission proposal with an eye toward reaching agreement among nations this year and with EU lawmakers next year.

The leaders’ commitment contrasts with German and French concerns about the pace of adopting a common backstop. A joint statement released May 30 by Chancellor Angela Merkel and French President Francois Hollande sought to delay plans to offer direct bank aid from the euro-area’s firewall fund until all other components of the resolution plan are in place.

Legal Foundations

Requiring lockstep moves could hamstring efforts to shore up EU banking and prevent another crisis flareup, the Brussels-based European Commission warned in a report obtained by Bloomberg News. That paper called for the EU to move ahead with all components of the banking union plan as fast as it can, saying that “concluding these steps should however not be conditional on one another.”

German Finance Minister Wolfgang Schaeuble has cautioned that the EU’s bank-oversight strategy must not outstrip the bloc’s legal foundations for joint action.

“The EU does not have coercive means to enforce decisions. Its historical roots are young. Its democratic legitimacy could be improved upon,” Schaeuble said on May 12. “What it has are responsibilities and powers defined by its treaties. To take them lightly, as is sometimes suggested, is to tamper with the rule of law.”

The draft summit conclusions seek to reassure financial markets that the EU hasn’t retreated from its financial stability commitments. The document calls for banking union to proceed in order to reduce financial fragmentation and restore normal lending channels.

‘Vicious Circle’

“The European Council recalls that it is imperative to break the vicious circle between banks and sovereigns,” the document states.

The leaders will also renew commitments to find ways to boost employment while continuing budget consolidation. The draft says leaders will scale back proposals for countries to sign binding economic-reform contracts in exchange for European financial support, saying further work is needed.

“Against the background of a weak short-term economic outlook, Europe is facing unacceptably high levels of unemployment, particularly for the young,” according to the draft. “Immediate action must be taken in that respect.”

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