Europe’s efforts to form a united front behind eurozone banks are reaching a climax, but many fear they will fail to restore confidence and prove flimsy should another crisis strike.
After more than a year of talks, ministers from across the EU agreed early on Thursday, a scheme to close failing banks, but the process will be complex and politicised. An agency and fund to wind down bad banks, working in tandem with the ECB as the new watchdog, is an important step towards banking union, but the loose ends could lead to the complete unravelling of the project.
Although hailed as a “historic” moment by France’s finance minister Pierre Moscovici, many who emerged from the meeting in Brussels were disappointed. “It’s really a farce,” said one senior official. We’re patting other on the shoulder and congratulating each other, but really what has been achieved is a far cry from what was needed.”
After the agreement, talks now begin with the European Parliament to finalise the law.
With no immediate banking crisis in sight, the new structure is likely to go untested for now, but it could buckle if one were to happen. Furthermore, promises to pool eurozone resources to deal with bad banks are so distant — only after 10 years if at all — that they will do little to shore up confidence.
In the meantime, banks will pay into a fund that will grow to €55bn, but only by around 2026, and that amount would have been entirely eaten up by the Irish banking bailout alone. New rules would, however, push more of the burden onto creditors.
Some officials fear missing elements in the scheme could restrain the ECB from revealing the true extent of banks’ problems in health checks next year.
For Alan Ahearne, an economist who advised the Government when it was sunk by its banking collapse in 2010, the deal does not amount to much.
“The sovereign is still the backstop for its own banking system,” he said. “That’s not a proper banking union. That means that funding costs for banks in peripheral countries remain high and sovereign borrowing costs will remain high.”
What has been achieved in Europe is a pale shadow of the US, where the federal government can transfer funds to help weaker states. Strong countries in the eurozone such as Germany do not send aid to weaker states such as Portugal or Greece. Instead, they lend them money.
The ECB, whose representative in the meeting Vitor Constancio was highly critical throughout negotiations, is not satisfied. But there is little the ECB can do.
Instead, it and others hope the deal can be toughened up in negotiations with the European Parliament. But it seems unlikely that they will be able to persuade Germany, which continues to stand firm against the use of eurozone money to back a scheme for tackling troubled banks, to soften its position.
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