Brussels has thrown down a gauntlet to Berlin: Failure to complete the banking union would send a deeply damaging signal to the world that the eurozone is incapable of putting its financial system on a sustainable footing.
Last week, the European Commission presented its draft proposal for a Single Resolution Mechanism—a legally binding set of arrangements for dealing with failed banks. This was a remarkable act of political aggression by Internal Market Commissioner Michel Barnier, in the face of Germany's well-flagged opposition. It says the decision to put itself in charge of the resolution authority is not a power grab but reflects the legal limitations of the European treaties.
Berlin fears the Commission's proposal simply hands national regulators another excuse to prevaricate in the hope that Brussels will ride to their rescue. And fortunately for German policy-makers, the Commission's proposal is clearly flawed. Although the Commission says its proposal is legally robust, it is controversially based on rules designed to protect the integrity of Europe's single market rather than rules governing the workings of the eurozone. Berlin has warned that using these rules as a basis to hand the Commission powers to levy a charge on German banks and to use the money to rescue foreign banks could be declared illegal by its Constitutional Court.
Even so, Brussels has thrown down a gauntlet to Berlin: Failure to complete the banking union would send a deeply damaging signal to the world that the eurozone is incapable of putting its financial system on a sustainable footing. The fact that Germany has no veto on the Commission's proposal adds to the pressure to find a compromise.
The key to any deal may lie in the sequencing: Germany may prefer an ad hoc arrangement that leaves national regulators with the responsibility for clearing up the mess. But Member States may demand a return a commitment to a treaty change to establish a future supervisory mechanism based on a new agency rather than the Commission.
Of course, that would require the consent of the UK, which may use any request for a treaty change to open a wider renegotiation of its EU membership. And it still leaves open the question of a common resolution fund, which Germany strongly opposes. How this standoff is resolved may determine the future shape of Europe.
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