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Friday, October 19, 2012
France and Germany clashed yesterday over the details of a banking union, with final agreement threatening to drag on until December, risking a return to volatility for the eurozone.
Ireland’s main issue — the recapitalisation by the EU’s rescue fund, the ESM, of the old bank debt — is still an open question.
However, the leaders were pushed to reaffirm their June statement that they want to break the vicious link between banking and sovereign debt, on the understanding that this would mean they will cover legacy assets, such as the €32bn Ireland put into its banks. The provisional conclusions do not mention the issue of legacy debt, and this was being seen by the Irish as at least a step in the right direction by not ruling it out at this stage.
Euro Commissioner Olli Rehn said the Government and the European institutions were making progress in their negotiations, but it was "too early to say anything about the likely outcome".
However, in Brussels last night Germany was trying to delay a banking union by raising a myriad of other issues, many of which will be anathema to others, and especially to France.
The plan is to have the legislation for the single banking supervisor agreed by the end of the year and possibly operational by Jul 2013. This is a prerequisite to the ESM directly recapitalising banks. The problem for Germany is that it wants a single banking supervisor with teeth, but not one that will turn around and bite small German banks.
The idea is that the national supervisors will continue to operate, but under the direction of the ECB.
Mr Rehn said: "We want to make sure there are no black holes like Anglo Irish Bank, Bankia and also quite some problems in the Landesbanks in Germany."
How they will square the circle was not clear last night, but the leaders will ask their finance ministers to work on the details and complete it for the December summit. There are suggestions the issue of legacy debt will be dealt with by putting a limit on how far back in time the ESM could go in effectively refunding governments the money they spent bailing out their banks.
While all focus is on Spain and its banking needs, Germany fears that France would like that its banks exposed to Greek debt could avail of direct bank recapitalisation.
French president François Hollande has taken on Chancellor Merkel directly, suggesting when he arrived for the summit that her focus was more on her election next year than on the needs of the euro.
Both have been matching one another with new ideas that are bound to irritate the other. President Hollande has been talking about eurobonds again, while Chancellor Merkel wants to put a super euro commissioner in place with power to veto national budgets.
Non-euro countries are also in a quandary, especially Britain and Sweden, as they want to be part of the Single Supervisory Mechanism — which will be the ECB — but under the current thinking they would not have a vote.
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