14 September 2013

Berlin mulls way to Banking Union without Treaty change

Before Vilnius

Reuters reported that the informal meeting of EU finance ministers and central bank governors in Vilnius on Friday and Saturday was not expected to break new ground. All signs showed that the ambitious plan for a single banking framework for the eurozone had stalled as Germany and others argued over its scope. European Commission President José Manuel Barroso and International Monetary Fund chief Christine Lagarde both said before the meeting that speed and progress were essential.

Eurozone leaders, however, seemed to see no deal on the resolution agency until December, after which talks will start with the European Parliament. First reactions to the July proposal had shown it was unlikely to fly, because it names the Commission as the pan-European resolution agency - a move some governments, including Germany, believe would give the EU executive too much power - and that to set up a European resolution agency, the EU needed to change its fundamental law, a lengthy and risky process. The Commission believes no such change is necessary.

In another article, Reuters quotes the German Handelsblatt saying that lawyers for the European Council had expressed doubts about a planned bank resolution fund to wind up or restructure failing banks, as it would not sufficiently protect member states' budget sovereignty.

Bloomberg reported that the fund, proposed by the European Commission as part of a Single Resolution Mechanism for banks, could be permissible if it is "deemed to be indispensable" and "an adequate mechanism to safeguard the budgetary sovereignty of member states is introduced", according to the legal service of the Council of the European Union, which represents the executives of EU countries. And the legal service’s 11 September opinion stopped short of calling for changes to the bloc’s governing treaties to establish the joint fund, a step Germany maintened would be necessary. The Financial Times (subscription required) also reported this as a "blow to German Banking Union plan".

OpenEurope's blog explains that essentially the Legal Service shares the Commission's view that the SRM proposal is needed to prevent fragmentation of the single market and that it will be applied uniformly. It also notes that the SRM is vital to the implementation of the Bank Recovery and Resolution Directive and the Capital Requirements Directive, while also arguing that, given the move to a single supervisor, a single resolution mechanism makes sense. Later on in the opinion, it is noted that the judgement on whether the necessity of an SRM set up in such a manner is ultimately a political decision – leaving it open to interpretation. It highlights however that the creation of the single resolution fund could have financial implications for the budgets of Member States - the caveat which reinforces the legal concerns regarding budget sovereignty of the German Finance Ministry.

After Vilnius

After the meeting in Vilnius, Reuters reported that, according to EU officials, Germany was now working on a plan that would allow the completion of a eurozone Banking Union without changing existing EU law, potentially removing a major hurdle to finish the most ambitious EU project since the start of the euro. 

In Berlin, a senior official said the government was thinking about many scenarios, not just one. Serious negotiations would only take place in November or December and were up to the next government, to be elected on 22 September, the source said. The choice of plan would depend on the outcome of coalition talks. But EU officials were encouraged that Germany was now engaging in the negotiations, having so far pointed to legal obstacles. One Brussels official said the proposal had raised hopes for a solution by year-end even if positions were still far apart.

Positions will still diverge considerably, reports the Wall Street Journal. Schäuble said in the press conference after the informal meeting that Germany was not the only country with objections to the Commission's plan, in reference to Swedish Finance Minister Anders Borg having told reporters that countries including Germany, Sweden, and the United Kingdom had raised questions about the proposal. "We want a Banking Union quickly, but on a solid foundation", maintained Schäuble.

Criticism of the Commission's plan was also voiced by the Federal Financial Supervisory Authority (BaFin), whose president Elke König was reported by the Süddeutsche Zeitung as saying in an interview with Wirtschaftswoche that the proposal as it stands was still 'half-baked'.