Another Crisis Wasted, EU Banks Get a Pass From Policy Makersby
Elections in Germany, France narrow readiness for integration
Competing visions of euro’s future create standstill
The euro area may be letting a good crisis go to waste again.
Even after a clean-ish bill of health in stress tests for the biggest banks and a plan to recapitalize the worst performer, Banca Monte dei Paschi di Siena SpA, investors aren’t convinced the ills of the region’s lenders have been cured. What’s worse, there’s little chance of a major overhaul of the bloc’s infrastructure any time soon.
As elections loom next year in France, Germany and the Netherlands, the prospects for political progress to shore up confidence in the single currency’s durability are diminishing, even with the added urgency of the U.K.’s divorce from the European Union. The 19-nation euro area still displays a fundamental split over the direction of its incomplete banking union and, beyond, how to create a common budget to complement monetary policy.
“There had been some hope that the banking sell-off post-Brexit would scare leaders into action -- that doesn’t seem to have happened,” said Raoul Ruparel, co-director of Open Europe, a London-based think tank. “There’s the concern that a call for ‘more Europe’ --more banking and fiscal integration -- would send the wrong message to the electorates where already a malaise about the euro has set in.”
In the European Banking Authority’s stress tests of 51 lenders, released Friday, only Monte Paschi had its capital wiped out under the adverse economic scenario. The bank announced a plan to offload bad loans and tap shareholders to rebuild capital buffers.
Patching up the troubled lender’s finances without using government funds is crucial for Italian Prime Minister Matteo Renzi, who called a referendum this year on an overhaul of the political system aimed at ending the country’s unstable governments.
Even though the bank exams showed that most lenders would keep an adequate level of capital in a crisis, financial shares led declines in the Stoxx Europe 600 Index on Monday, as they have so far this year.
There is no shortage of proposals on how to solidify the bloc -- just a shortage of consensus. Roughly, there are two competing visions; a Germanic one and a version more popular closer to the Mediterranean. The first emphasizes a return to national responsibility; the second a movement toward greater sharing of risks.
The Germanic vision goes back to the desire for the euro to be a club of nations standing independently but following joint rules, in the spirit of the founding Maastricht Treaty. In that vein, the German central bank and the panel of economists that advises the government have proposed versions of a sovereign debt restructuring mechanism, based on the existing ESM rescue fund, that would restore credibility to the “no bailout” clause in European law.
By contrast, proposals in Italy and France entail the sharing of more risk across borders, not less. Italy is arguing for a euro-area unemployment insurance scheme. And both would like the completion of something that was agreed to in 2012, when there was the threat of imminent implosion, namely a banking union that shares supervision, resolution and deposit-insurance tasks.
On the Germanic side, there’s little enthusiasm for movement in this direction until the risks on Italian bank balance sheets have been cleared up, according to Lars Feld, a member of the German government’s council of economic experts. That has kept a proposal for joint deposit insurance -- the so-called third pillar of banking union -- on ice since 2012.
“We’re in a phase which is about establishing then consolidating the banking union, in the sense of getting past all those legacy assets,” Feld said by phone from the Walter Eucken Institute in Freiburg, where he teaches. “This primarily has to be done within the responsibility of the member states.”
Even if the euro area is at a standstill in terms of progress toward greater integration, the bloc is better equipped to handle financial turbulence than before. The European Central Bank took over supervision of financial institutions after a major health check in 2014, and resolution became a joint task at the end of last year. Lending growth has begun to revive.
For Nicolas Veron at the Bruegel Institute in Brussels, an advocate of the region’s financial integration, Italy is the last big remaining problem in the bloc’s cleanup. What’s important now is to focus on the restructuring or winding down of banks, a process he describes as “painful but necessary.”
Yet the list of what’s possible diverges from what would be ideal, according to Alan Lemangnen, euro-area economist at Natixis SA in Paris. For instance, a bad bank that could lift the stock of non-performing loans from the region’s lenders without hobbling any single government would be helpful, but not likely. Agreement on how to measure and lay up capital against the sovereign-debt risks still on the books is also needed.
“Agreement on the third pillar of the banking union is possible, though nothing is likely to happen until the German elections,” Lemangnen said. “Until then, we still need to clean up balance sheets in countries where the job hasn’t been done properly like Italy, Portugal, Cyprus and Greece. It sounds so 2014, but it’s still true.”