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When Europe’s leaders agreed on a banking union a year ago, many called this the turning point in the financial crisis. But we are as far from the end of the crisis as we are from creating a true banking union. At best, transferring the supervisory authority for eurozone banks to the European Central Bank is just a first step – the first of many.

This decision was taken hastily: its purpose was to give ailing banks access to the European Stability Mechanism, a fund backed by the European taxpayer to help ailing eurozone states, not their banks. But in June 2012, at a European summit, Angela Merkel, chancellor of Germany, made a pledge that the ESM should be opened up for direct bank recapitalisation.

This decision was not only controversial: she made this announcement only one day after the Bundestag, the German parliament, had amended national law to rule out this option. Furthermore, it was a policy error: the ESM was created as an emergency assistance programme for endangered countries. It was never meant to be a bank rescue fund; its capital structure is not made for it, either. Consultations concerning the matter are expected to be finalised at the Eurogroup meeting this week. They should use this opportunity to change direction.

Recapitalisation of banks usually means becoming one of their shareholders – and being prepared to take the risk of losses if the equity loses its value. That is not a task for which the ESM is designed: if it were to suffer a loss on an investment, it would have to be compensated with fresh capital from the member states.

This has consequences for the rating and the lending capacity of the ESM. According to rating agencies, for every euro invested in shares of a bank, the facility’s lending capacity is reduced by three euros. This reduces our capacity to deal with sovereign problems. And worst of all, the prospect of this new source of money for banks allows them to defer painful adjustments in their balance sheets.

At the end of 2012, non-performing loans made up more than 24 per cent of loans in Greece; in Spain the ratio increased to more than 11 per cent; in Portugal the figure stood at 10 per cent – double that of the previous year. In Ireland, more than 15 per cent of all property loans for owner-occupied real estate are behind in payment.

The prospect of an ESM bailout takes the pressure off the banks to deal with these losses. Opening the fund for the direct recapitalisation of banks will not break the vicious circle of government debt and bank risks. Quite the contrary: it would become even worse. A supervisory institution without the authority to wind up failing banks is, in effect, a guarantee of survival for big banks. The ESM would strengthen their capacity to blackmail the public.

This is why we urgently need an independent institution to wind up insolvent banks. It must have the right to close down banks and must be up and running at the same time as the supervisory authority.

In order to make it possible to shut down banks without wider spillover effects, we also need a resolution fund, financed by the financial sector. Some of the revenue of a financial transaction tax could be used – and the willingness of a country to introduce this tax could be a precondition for joining the supervisory mechanism. It would be a way to make sure that countries with a large financial sector implement the FTT – particularly current holdouts such as Luxembourg, Britain or Ireland.

After all, what is the alternative? A patchwork of national resolution regimes, as suggested recently by Ms Merkel and President François Hollande of France is no viable solution as many banks operate across borders. A real banking union would be a tremendous step towards more European integration. Nobody should fear the necessary treaty changes. The ESM was set up through a small treaty change on short notice, too.

Member states should remain responsible for banks’ legacy assets, since they occurred under national supervision. Financial aid should remain confined to countries only, and it must remain linked to macroeconomic adjustment programmes. But if we want to continue towards a fiscal union, we need to find a solution to the problem of our outsized public debt. Instead of making it a more serious problem with new tax money via the ESM, we should make sure that European banks can fail.

The writer is s spokesman on finance in the Bundestag for Germany’s Social Democratic party

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