December 13, 2012 6:21 pm
Twice this year, the actions of European leaders have matched their grand rhetoric: in June, when they vowed to set out on the road to banking union, and this week, when they made good on a promise to put the first foundations in place by the end of 2013. They may not yet appreciate the full reach of the constitutional changes they have set in motion.
The deal struck by finance ministers early Thursday morning confirmed that political change in Europe is driven by Germany. In contrast to the proposed EADS-BAE Systems merger, Berlin dropped its opposition and made this deal happen. Intransigence by Wolfgang Schäuble, finance minister, now looks like an astute negotiating tactic that has secured a German imprint on the “single supervisory mechanism”. This focuses European Central Bank supervision on the larger banks, while obtaining population-weighted voting for some decisions of the new supervisory board.
Berlin was able to compromise, too. Economically, it is crucial that the ECB was allowed in extremis to intervene in smaller banks. Politically, higher voting hurdles in the European Banking Authority was the price paid to temper divisions between banking union “ins” and “outs”. A majority of outs will now be able to stop the ins from forcing decisions through en bloc.
There is much to like in the substance of the agreement, even if only the broadest contours are clear. It establishes the principle that a regulator captured by local interests can be overruled. This caused the crises in Ireland and Spain and set off the lethal spiral between bank and sovereign debt across the eurozone. That such a serious step towards completing the euro’s infrastructure could be taken without alienating nations on the political periphery of the European project bodes well for the safety of the single market.
Much uncertainty remains, however. If fewer than five EU members are outside the banking union, the EBA’s double majority rule will be revisited. That could happen soon if only the British, Swedes and Czechs stay out. Even if the deal on supervision sticks, it still leaves open the much harder issue of supranational power to shut down or break up bust banks.
This week’s deal no doubt marks real progress. But as always, the EU chose to erect a new governance structure on top of unresolved political battles, which will resurface when the new powers begin to be wielded. This may be the only way to move forward, but it spells more turmoil ahead.
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