EU left guessing as Merkel blazes her own path

Judas, talking tough, or electioneering?

Which best describes Iron Lady Angela Merkel and the German chancellor’s thunder-bolt statement to journalists on funding legacy bank debt when the two-day EU summit ended?

Senior EU sources were inclined to play down her declaration, saying there was a long list of U-turns by Germany over the last two-and-a-half years. Others feared that markets might take her seriously and send the price of debt for weak countries soaring.

This was the first summit for a long time which was not happening during a crisis for the eurozone. The markets were relaxed, there was no real pressure, and in a way this can present its own problems.

While some might say that economics is “common sense made difficult”, the fact of the matter is that frequently the only person in the room with the leaders who could read a balance sheet or truly understand the intricacies might be the president of the ECB, Mario Draghi.

Whenever the agenda is light, with no major decisions of policy to be made, hours can be spent on details and difficulties generated from very little. For instance they spent a full hour teasing out what could be meant by a “fiscal capacity” to be “explored for the euro area”.

In some ways the elephant in the room for Spain and Ireland — direct recapitalisation of their banks by the EU rescue fund the ESM — was not discussed at all. The feeling might have been to let sleeping dogs lie — not to open the issue in case someone made a decision that became policy. The Spanish also fear giving anybody an opportunity of trying to push them into seeking a bailout.

So it was agreed that EU finance ministers will draw up the exact operational criteria that will guide direct bank recapitalisations by the ESM “in full respect of the 29 Jun 2012 euro area summit statement”.

The sentence dealing with bank recapitalisations was unchanged from the very conditional statement of four months ago. “When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalise banks directly,” it stated.

Nobody expected Merkel would create trouble once she left the meeting room. Just a few floors down she reiterated what her Finance Minister Wolfgang Schäuble has said several times, but when she did not mention old bank debt, it was thought that he had been flying a kite.

A senior EU official considered that her raising it was strange since the opposition in the Bundestag had not been attacking her over it, and so were not making it an election issue. Perhaps Merkel intends to use it as a bargaining chip. She also appears to have lost her fellow hawks on this issue, with the Finns saying they would consider funding legacy debt case by case, and the Dutch saying they only excluded bad banks.

But this issue is overshadowing what many see as a revolution in the development of the euro: Putting all eurozone banks — and non-eurozone if they wish — under a single supervisory mechanism.

If this had been in place 10 years ago, it is very likely there would not have been the current crisis with national supervisors much too close to their client banks, and departments of finance happy to ignore pending disasters.

The ECB will be in overall charge, working through national supervisors but in a position to see the books at any time and identify dangerous trends early.

They did agree that the legislation necessary to establish the SSM — the supervisory set-up — will be agreed by Jan 1, and during the course of the year the ECB will gradually install itself in the job — with the necessary Chinese walls to keep its different functions separate.

Once this SSM is operational, then the ESM can bypass national governments and lend directly to banks.

For Ireland the devil will be in the detail. First of all it will have to agree to cover more than banks for which the new ECB supervisor was not responsible. Then it will have to decide whether to take over the running of the banks it funds — how will AIB like having German bankers on its board?

How will the banks be valued, who will run them and if — when — they are eventually sold off will part of any profit be returned to the State?

These decisions will be made firstly by the technical experts from the member states and will then be adopted by the eurozone finance ministers.

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