European Banking Union or European Banking Division?

by Julie Aelbrecht. Originally published on 2014/02/10

The European Banking Union. What is it, why is it happening and will it solve the Euro crisis?


Over the last year, the ending of the economic crisis has often been reported by traditional but also by new media. There is no doubt that there are good signs, and most specialists concur that the most acute problems have been solved, but sustainable recovery is still a long way off. Europe’s situation can be compared to that of a greenhouse plant, slowly sprouting new leaves, but far from ready to survive in the wild. In other words, we still have a long way to go.

There are many causes to the crisis, most of which are very complicated In short, the bankruptcy of Lehman Brothers in 2008 was just the spark that ignited the crisis, although specialists in the field argue that the crisis would have happened anyways. Already in 1976, a group of European economists named the Optica group reported that introducing a one-size-fits-all euro for all European countries would have disastrous consequences. Amongst these complex causes are the so-called constructional errors in the Eurozone. One of these errors directly ties into the topic of this article, namely the lack of a solid monetary and banking union.

Eureka

A banking union has three main ingredients: a common banking supervisor, a single resolution mechanism for winding down failed banks and, thirdly, a single insurance scheme to prevent bank runs which will have to be responsible for the entire Eurozone. The full process will take many years to complete, but the first step has already been taken. At the end of 2013, the European Commission decided that the European Central Bank (ECB) will have supervision over the largest banks in the Eurozone. The Commission made a resolution to set up a Single Supervisory Mechanism and have an Asset-Quality Review of all major European banks.

Seeing as the banking crisis quickly spread across borders, it seems logical to tackle the problem on a supranational level. President of the European Commission José Manuel Barroso stated that the proposed mechanism “will restore confidence in the supervision of all banks in the euro area,” emphasizing that the European Union intends to “break the vicious link between sovereigns and their banks”. The EU’s Internal Market Commissioner Michel Barnier added that the “ultimate aim is to stop using taxpayers’ money to bail out banks.”(Source: press release on Europa.eu)

The European Parliament and all member states agreed on the specifics of the European Central Bank (ECB) oversight of Eurozone banks earlier this year, however, the first step towards a European banking union will be an Asset-Quality Review of the major European banks and the establishment of a Single Supervisory Mechanism in 2014. The Asset-Quality Review (AQR), which is a new and improved version of the so-called stress-tests, will provide the opportunity to finally eliminate weaknesses in banks that carry an unsustainable state debt, weaknesses that have made the Euro crisis so persistent. The Single Supervisory Mechanism (SSM) is the mechanism the ECB will use to safeguard the financial stability of Eurozone based banks. Initially, the SSM will focus on banks that make more than 30 billion euros annually or have a significant share in their countries’ GDP. The SSM will not supervise each bank directly, but can seize control when it is deemed necessary. Not all EU member states will participate; participation is only mandatory for Eurozone countries, while the others have the option to join the SSM, but can never become full, voting members. In return, they are not bound by the ECB’s decisions.

So what’s the big deal?

In theory, the biggest problem is that two fundamental ideas that accompanied the creation of the Eurozone are currently challenged by the idea of creating a banking union. The first is that of a minimalist monetary union; the idea that we could share a currency, but nothing else. Secondly, the Euro-outsiders could nurse the illusion of a false menu choice: the ability to pick and choose areas of European integration to take part in. Remaining inside the EU but outside the Eurozone would become increasingly difficult to coordinate. The banking union and its results could ultimately be the biggest act of political integration in Europe since the creation of the European Economic Community 55 years ago. You could say that this might be even bigger than the euro itself because these measures are a significant intrusion on national sovereignty.

Divide or conquer?

The criticism over the ECB’s plans is wide-spread and many-fold. Germany, in particular, has stated its disapproval of the mechanism, as it sees it as incompatible with current EU treaties. Critics have stated their concerns in that this mechanism will result in taxpayers’ money being used to pay off other nation’s failed banks. Additionally, if the AQR is just a new name for the old stress-tests, there is no way to tell if it will be less of a farce than before. To make matters worse, the old-fashioned concern for over-regulation is massive. For example, subsidiaries of Eurozone banks in London could ultimately be under supervision of no less than 7 regulatory organs: The ECB; their home country regulator; the Bank of England; the Financial Conduct Authority; the European Banking Authority; the European Securities Market Authority; and the European Insurance and Occupational Pensions Authority.

And what should happen to those countries that decide not to join the banking union? The negotiations over the supervision of the union were already strained over voting rights for the ten non-Eurozone countries, who could, if worse came to worse, find themselves consistently outvoted by the 17 Eurozone countries. The Swedish Finance Minister, Anders Borg told reporters that: “At the end of the day, it’s about whether or not the rules governing the European Banking Authority will mean that countries outside the Eurozone will be dominated by those in it.”

The question remains: how many of the ten outsiders will join the seventeen in the banking union? And if the ECB has no real say over the non-Eurozone countries, will that result in a weak banking-union or a strong banking union for the core countries? In a perfect world, the Eurozone could usurp the EU with its own banking union, its own budget and political union and, eventually maybe its own single market. Of course, these things that are not legally possible under the present EU regulations but could follow from the successful implementation of the banking union. Unfortunately, though the project of establishing a banking union can unite the EU’s core but it will also separate it further from the rest.