Germany Is Wrong to Delay a Real Banking Union for Europe
Within the next few weeks, the European Commission is due to announce plans for a single bank-resolution authority for the euro area, a reform that is crucial for maintaining confidence in Europe’s financial system.
Germany’s finance minister, Wolfgang Schaeuble, has long expressed doubts about this step. He has said it would require changes to European treaties -- meaning it can’t be done quickly -- and has opposed the pooling of taxpayer liabilities. This week, in an op-ed article for the Financial Times, he restated his reservations. The timing seems calculated to undermine the commission’s proposal.
Schaeuble isn’t as obstinate as he is often made out to be. He is showing a newfound flexibility on fiscal austerity, recognizing that it can be taken too far. And his doubts about a full EU banking union aren’t unreasonable: A true union is a big step, and in an ideal world he would be right that Europe should move cautiously. Sadly, this isn’t an ideal world. Europe is trapped in a severe recession, and its financial sector is fragile. The EU can’t afford to take its time.
An EU banking union would require three main components: a single supervisor, a single resolution authority to wind down troubled banks and a single deposit-insurance system. Governments agreed to the first part in December, when they put the European Central Bank in charge and began working on implementation. The third part, collective deposit insurance, had already been slow-tracked before Schaeuble’s most recent comments. Increasingly, the second part looks ready to be shelved as well.
Whether a banking union really does require a new treaty is debatable. The European Commission seems to think otherwise. Officials there have said that the necessary changes can be made within the terms of existing EU laws. But if Germany’s government (to say nothing of its constitutional court) decides otherwise, delays seem inevitable.
Does it matter? Yes. Arrangements for resolving distressed banks can break the circuit that connects financial-sector failure to public-sector insolvency -- the very link that caused the euro area’s financial crisis of 2010 to flare out of control. A single resolution authority, backed by a single resolution fund, would commit the resources of the whole euro area to the task of closing and restructuring failed banks. Anything less means troubled banks would continue to be capable of bankrupting sovereign governments.
Schaeuble understands this. He acknowledges the vital importance of an effective bank-resolution system and rightly says that reform can’t wait until the long process of treaty revision is complete. He therefore proposes an intermediate step based on “a network of national authorities.” He adds: “Instead of a single European resolution fund -- which the industry would take many years to fill -- such a model would lean on national funds, which already exist in several member states.”
This vague formula leaves room for maneuver. Schaeuble clearly states that the costs of bank restructuring, especially those arising from errors made under the previous regulatory system, shouldn’t simply be pooled. But he hasn’t said exactly how Europe should “lean on” national funds or whether cross-border transfers of any kind should be allowed. A variety of ad hoc arrangements and cost-sharing formulas might be consistent with what he has said.
Even so, this wouldn’t be a banking union, and it wouldn’t sever the link between bank failure and national insolvency. In a way, that’s the point: Schaeuble’s real concern is to preserve this connection. The pooling of risk that a true banking union entails would expose German taxpayers to unknown costs stemming from financial breakdown in other countries. A banking union involves fiscal transfers. German taxpayers don’t want that, and Schaeuble thinks he’s looking out for their interests.
They are wrong, and so is he. Europe’s crisis has made it clear that a monetary union is unacceptably dangerous without a genuine banking union. Germans have at least as much to gain as other Europeans from a euro system that contains financial crises instead of propagating them, even if the added safety comes at some (usually modest) fiscal cost.
It’s too late for the weighing of arguments and constitutional propriety that Schaeuble says he wants. Germany should have thought about all this before it agreed to create the euro. Now that the single currency exists, Europe needs a full banking union to go with it, and it can’t happen too soon.
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