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The establishment of the banking union: a big step forward for Euroland, by Harald Greib

For the time being Euroland is first and foremost a zone managing a common currency. But this management is based on weak foundations. Many economists consider that a single currency can only be sustainable if it rests upon a political union, the kind of union which national politicians failed to agree on during the Maastricht Treaty’s negotiations.

If we have a look at the short history of the Euro, we must admit that it succeeded in imposing itself as a globally recognized currency, as the world’s second reserve currency, and that in the end it survived pretty well the post-2008 financial crisis (in which many anticipated its trespassing) and recovered a fairly good value against the dollar and other major global currencies.

The Euro survived as a result of bold political decisions to provide financial assistance to member-states in difficulty and to create an institutionalised rescue system of European funds, the ESM (European Stability Mechanism).  In doing so, Euroland proved that, even devoid of any political entity status, it was capable of acting as a political union.

From a different angle, Euroland also tightened its degree of integration: slowly but surely, the concept of solidarity among member-states is catching on. The ESM’s legal capacity to buy bonds of member-states in difficulty on the secondary market, as well as the ECB’s declared will (unrivalled by member-states’ governements) to do the same thing, is similar to Eurobonds. The pooling of member-states’ debts is underway.

These measures and decisions were made in the urgency of the crisis. However this crisis if the direct result of an unbridled speculation from banks and investment funds which a policy over-confident in the sole virtues of the market had freed from any regulatory constraint. As they saved banks, goverments nationalised private debts and the financial crisis became a state crisis.

The banking sector’s capacity to cause economic and financial damage has clearly demonstrated that the financial market must be regulated, just like any other market by the way, whether food, building or car making. Only through constant political and ideological pressure have bankers managed to convince policy-makers that an unbridled financial market would provide the conditions for prosperity in the future. It is high time to send this faith to the cemetery of religions and burry it next to the communists’ planned economy.

Such is the task Eurozone member-states gave themselves by means of their banking union project.

This union consists of two parts:

A “preventive” part, i.e., the regulation of banking activities.

And a “curative” part, i.e., the rescue, or even resolution, of failing banks.

The first part, alas, hasn’t gone very far – the resilience of ideologies is always amazing. Besides the obligation for banks to raise their equity ratio and a remote project (2020) to ban proprietary trading, there is still a great deal to be done in order to reduce the importance of big banks and the risk they represent for the economic and financial system. The creation of supervisory and controlling competence of big European banks at the ECB, due to be operational in the course of 2014, is cold comfort: before controlling, there must be rules to control.

But the “curative” part is in a better shape. Before the end of the year, the Ministers of finance of the Eurozone managed to agree on the creation of a resolution fund, consisting first of a network of national funds, then to be turned into a real European fund (up to 10% per annum on their capital and in ten years) accessible to all major European banks in liquidation. This is a proper pooling of risks on a European level. This is also a blow to Merkel and her resounding “no” to any European transfer union and to any pooling of European debt. It is therefore not very surprizing that, in front of the German media,  her finance Minister only mentions the national side of these funds, in charge of rescuing national banks, and avoids refering to the planned evolution towards a European system of active solidarity. Even a Germany dragging its feet couldn’t prevent the establishment of European solidarity rhyming with common currency.

With so much progress in the establishment of a banking union, Euroland has proved its capacity to develop the political union required for a sustainable Euro. Now Euroland should also consider coordinating the macro-economic policies of its member-states in order to avoid that the rush towards lower production costs in the member-states results in a Europe giving up on its wages and environment standards in favour of greater competitiveness. How ludicrous it would be to be competitive at the cost of becoming poor! What a political mistake it would prefer economic growth to Europeans’ well-being!

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Useful information:

“Conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions”, Council Regulation (EU) No 1024/2013 (15 October 2013)

“Banking supervision – What is it?”, ECB

What other think of it ?

“L’union bancaire pour les nuls”, Le Figaro

Bankenabwicklung und Bail-in – eine vorläufige Bewertung, Axel Troost/Rainald Ötsch, Nachdenkseiten.de

Union bancaire : Le grand bond en avant, Presseurop

About Marie Hélène