Financial Services

On the rocks

June 08, 2012

Europe

Banking

June 08, 2012

Europe
Monica Woodley

Editorial director, EMEA

Monica is editorial director for The Economist Intelligence Unit's thought leadership division in EMEA. As such, she manages a team of editors across the region who produce bespoke research programmes for a range of clients. In her five years with the Economist Group, she personally has managed research programmes for companies such as Barclays, BlackRock, State Street, BNY Mellon, Goldman Sachs, Mastercard, EY, Deloitte and PwC, on topics ranging from the impact of financial regulation, to the development of innovation ecosystems, to how consumer demand is driving retail innovation.

Monica regularly chairs and presents at Economist conferences, such as Bellwether Europe, the Insurance Summit and the Future of Banking, as well as third-party events such as the Globes Israel Business Conference, the UN Annual Forum on Business and Human Rights and the Geneva Association General Assembly. Prior to joining The Economist Group, Monica was a financial journalist specialising in wealth and asset management at the Financial Times, Euromoney and Incisive Media. She has a master’s degree in politics from Georgetown University and holds the Certificate of Financial Planning.

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For the past two and a half years, European Union politicians have been caught in a catch 22. They seem to realise that the only way to save the euro is a more integrated, federal Europe, yet they face such opposition from their counterparts at home and their citizens, who fear a loss of economic sovereignty, that they cannot take the steps needed to make that necessity a reality.

The result has been a series of actions that have delayed but not stopped the slow-motion car crash that is the euro crisis. The latest proposal could be a decent compromise that at least controls the brewing banking crisis – if not the debt crisis – and should stabilise the currency area, but it will face similar opposition to past plans.

The idea is a banking union - for the eurozone countries, at least - and it involves moving support and supervision of banks from the national to the EU level, giving an agency the authority and capacity to restructure or close failing banks and instituting a eurozone-wide deposit protection scheme, backed at first by rescue funds.

It has been advocated by Jose Manual Barroso, president of the European Commission, Mario Draghi, president of the European Central Bank, Herman van Rompuy, president of the European Council, and Jean-Claude Juncker, chairman of the Eurogroup of eurozone finance ministers. So just a few people who hopefully know what they are doing. Proponents say this will halt the slow but growing bank runs in Greece and Spain and restore confidence across the eurozone, without pushing true fiscal integration.

However, the Germans are, as usual, opposing any pooling of resources. German banks are insisting on keeping deposit protection schemes ring-fenced domestically, saying that it would mean strong banks (ie, them) supporting riskier rivals (ie, everyone else in their view). They also argue – and this may be the crux of the matter - that a joint EU scheme could allow banks in peripheral countries to compete more aggressively in Germany.

There are other obstacles beyond German opposition. The banking union would likely be for eurozone members, rather than the whole EU. The UK would never give control of supervision of its banks to a central EU authority – with its large and powerful financial services sector that would be a political impossibility. Yet, the most obvious choice to be the EU supervising institution – the European Banking Authority – is located in London. The next choice would be the European Central Bank, which can be empowered to supervise by a unanimous vote of the European Council. Even if that unanimous vote is won, there is still the issue of logistics – setting up the institutions, bringing in the experts and agreeing the rules needed.

So there are many reasons why a banking union will not happen. Yet necessity might still overcome those reasons. The short-term fixes being considered are steps towards a banking union. European officials are currently weighing up a bail-out of Spanish banks, with support contingent on increased external oversight (by the EU).

The concern is that, like most EU action, the banking union will come about slowly, forced by worsening conditions – rather than decisively, in a way that could truly restore confidence.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Economist Intelligence Unit Limited (EIU) or any other member of The Economist Group. The Economist Group (including the EIU) cannot accept any responsibility or liability for reliance by any person on this article or any of the information, opinions or conclusions set out in the article.

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