EU's Banking Union Shows Weakness, not Power, Defines European Bloc
November 29 2015 - 1:53PM
Dow Jones News
By Simon Nixon
The European Union is widely blamed for many of the continent's
current difficulties. Critics accuse Brussels bureaucrats of riding
roughshod over national sovereignty, crushing economies with
unworkable fiscal rules, stifling enterprise with red tape and
tearing down national borders to expose EU members to unrestrained
migration and a growing risk of terrorism. Euroskepticism now
dominates the political agenda in countries as varied as the U.K.,
France, Poland and Italy.
But this narrative misses the point. Contrary to the lofty
rhetoric of some federalist dreamers, what marks the EU isn't its
power but its weakness. The European project has advanced over the
years in response to crises, exactly as its founder Jean Monnet
predicted. Its member states have consistently reached for common
responses to common challenges. But other than in the areas of
trade and competition policy, real power continues to belong to
national governments. If the European project now faces a real
danger of collapse, the fault lies more with member states than
Brussels.
Take the case of the EU's banking union, the bloc's flagship
response to the eurozone crisis. Last week, the European Commission
published new proposals to create a common European
deposit-insurance system, which many economists argue is vital if
the banking union is to succeed. Indeed, the commission's decision
to present this proposal followed a recommendation by the heads of
the main EU institutions earlier this year in their so-called Five
Presidents Report, which concluded that common deposit insurance
was an essential step to restore confidence in the long-term
viability of the single currency.
In many respects, the case for pushing ahead with common deposit
insurance is impeccable. National governments have already given up
responsibility for regulating banks and winding them up if they
fail, so its makes sense that the costs of bank failure should be
borne at the European level too. What is more, without common
deposit insurance, Europe's banking union is likely to remain a
banking union in name only: so long as the quality of the guarantee
underpinning a bank's deposits is dependent on the country in which
the bank is based, a genuine cross-border banking market is likely
to remain elusive. Conversely, the whole of the eurozone stands to
benefit from the creation of a genuine cross-border market.
Yet even this relatively modest proposal, chosen because pooling
deposit guarantee funds is far less ambitious than some other ideas
to increase eurozone risk-sharing, may prove too difficult. That is
because the necessary trust among member states has evaporated,
reflecting fears that some countries are either unable or unwilling
to reduce the risks arising in their own jurisdictions.
Part of the problem lies in the failure of member states to
implement even what has been agreed upon already, including the
EU's new rules for "bailing in" creditors of failing banks and for
winding up failed banks, even though those new rules are supposed
to come into force Jan. 1. Only last week, the Italian government
took the decision to bailout four small and systemically
unimportant lenders which, while not yet illegal was certainly
contrary to the spirit of agreed-upon EU rules. At the same time,
the EU's supposedly common banking rules remain full of national
loopholes and exemptions so that there is no level playing
field.
But these problems should be easy to resolve compared with the
much bigger risks arising from the actions of national governments.
After all, only this month Greek banks were forced to raise EUR14
billion ($14.8 billion) in new capital to plug holes arising from
Athens's destructive, six-month standoff with its creditors over
its bailout program. Should depositors in the rest of the eurozone
be forced to insure depositors in other countries against the
consequences of the economically ruinous policies of their national
governments?
Similarly vast differences in national foreclosure rules and
insolvency frameworks can have a material impact on bank solvency.
Greece, for example, is to exempt a quarter of mortgage-holders
from new foreclosure rules, while in Italy it can take up to 10
years for a bank to seize defaulted collateral. Why should
depositors in other countries be exposed to these risks?
Brussels officials hope that their plan, which foresees only a
gradual pooling of deposit guarantee funds, can be used to drive
harmonization of legal and institutional standards. But the wider
political risks arising from national government policy choices
can't be simply wished away--and these risks are rising along with
the electoral fortunes of euroskeptic parties. Only this week, a
new minority Portuguese government took office backed by
parliamentary support from the anti-EU Communist party.
Some argue that the best response to the euroskeptic challenge
is to show that the EU can still deliver common solutions to common
challenges by pushing ahead with projects such as common deposit
insurance. But if those common solutions depend on the willingness
and capacity of national governments to deliver their side of the
bargain, this may prove a leap of faith too far.
(END) Dow Jones Newswires
November 29, 2015 13:38 ET (18:38 GMT)
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