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Germany is vehemently opposed, the window for legislation is closing and the reform alliance is suddenly cracking: it must be time for the European Commission to unveil its most ambitious plan yet for Europe’s banking union.
Showing its usual flair for countercyclical political timing, Brussels is poised to serve Berlin exactly what it does not want: a blueprint for a central executioner to shut down failing eurozone banks, if necessary against the protestations of the lender’s home state.
Should the draft proposal survive, which is far from certain, those far-reaching powers and access to a big pot of common money would be granted to none other than European Commission – or so the body itself hopes.
It is a tall order but admittedly what EU leaders – in principle – asked for last June and asked for again last December. A common means to call time on struggling banks is the cornerstone of any genuine financial union and one step closer to pooling financial risks across eurozone taxpayers.
The supreme executioner would be the antidote to supine national authorities that many EU leaders feel helped create the three-year-old eurozone crisis. And it would be the complement to the European Central Bank’s new role as top bank supervisor – an earlier reform the commission drove through in a matter of six months with a mix of boundless optimism and blind perseverance.
This time, though, the potential downsides of overreaching are plain. This overhaul involves money, raw sovereign power and carries huge legal liabilities – creditors naturally turn to lawyers when banks are forcibly closed. The danger is that a botched resolution reform might be worse than doing nothing at all.
Even as it puts the finishing touches to the proposal, the commission’s political platform is fracturing under its feet. First Angela Merkel and François Hollande emerged with a Franco-German “contribution” backing a vague resolution board that could be no more than a patchwork of national resolution authorities.
Then Mario Draghi, the ECB president and the commission’s best friend on resolution reform, started qualifying his support. A “resolution mechanism” was crucial he said, but that was “a different thing” from a single resolution authority. For all the jargon, he could almost have been speaking German.
This is giving pause to even the commission’s most ardent centralisers. Plans to publish the legislative proposal later this month – and ahead of an EU summit – could well slip. Pressure is building to bend to political realities, scale back controversial elements, or at least sequence them to better fit Berlin’s timetable.
Not to be forgotten is the question of whether the commission’s regime would actually work, even before it is mangled by the political bargaining process.
Giving the job to the Brussels-based executive also creates tricky anomalies: the commissioner from Britain, whose financial institutions would fall outside the banking union regime, would have as much to say on the closure of a French bank as the commissioner from France.
Underlying the reform is also a faith that crises are solved by committee. Yet as a rule authorities passionately disagree about shutting cross-border banks. No structure compensates for key players refusing to talk. Disputes tend to generate unhelpful leaks that prompt creditors and depositors to abandon the banks before haircuts can be imposed or solutions agreed.
Such friction is impossible to avoid in a banking crisis. More worrying for the commission is the sheer number of ways in which capitals are seeking to preserve national control of stricken lenders.
For example, more flexibility for governments when forcing losses on creditors in failing banks – as demanded by France and the UK – would make it harder for any central authority later on to enforce its writ.
If diluted to suit national capitals on such crucial points as this, the initiative could go the way of other EU attempts to impose fiscal and financial discipline across the bloc. The Commission would promise the world, only to give rise to a system that would force cash-strapped weak countries to practise what large and richer countries only preach.
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