Germany Is Outmanoeuvred On An EU Banking Union And Will Have To Fund It

James Marshall writes from Brussels: Addressing the Bundestag, Angela Merkel put a brave face on her defeat in Brussels over a banking union. She talked about building a better Europe for the country’s children and children’s children. The new banking union is to begin in March 2014. Why then? To avoid it becoming an issue in the German general election next year. That reveals how sensitive the issue is to German voters. Frau Markel is a magician in disguising her real policies. She speaks in opaque language which appears to permit various interpretations. This presumably is related to her previous emergence as a top scientist.

So what is the banking union? The lame ducks in the European Union (EU) want a pooling of all banks. That means there would be common responsibility for debt. A failing bank in one country would be bailed out by the others. A great idea if you are a basket case. However if you are a strong country, such as Germany, it means pouring money down a black hole. Since most states are next to bankrupt, Germany will have to provide the lion’s share of the rescue funds. However all is not lost. Only 150-200 of the biggest banks are to come under the jurisdiction of a new banking supervisory authority. Almost no German banks will be included. Frau Merkel is quite right to doubt the ability of a pan-European authority to regulate EU banks. After all no national authority or the European Commission foresaw the banking crash of 2008. Britain, Sweden and the Czech Republic say they will not join the new body.

The genesis of the idea of a banking union emerged in June when Angela Merkel was ambushed by Mario Draghi of the European Central Bank and Mariano Rajoy, the right wing Prime Minister of Spain. They forced her to accept that failing banks could be funded from the European Safety Mechanism (ESM). This was because sovereign debt in many states was so high they were in no position to bailout one of their failing banks. So the politically charged debate about governments, such as the German one, having to bailout Greek or Spanish banks could be avoided. The money could be slipped to the ESM without taxpayers really noticing. It was an astute sleight of hand. Angela Merkel gulped and swallowed it.

David Cameron is pleased that he has won a concession that the new union will not hurt the interests of the City of London. It is too early to celebrate. Frankfurt and Paris are jealous that the City holds over 1.4 trillion of euro assets and trillions of euros are transacted every week. They would like that business. The danger is that they will ask the European Court to rule that euro business should be transacted within the Eurozone.

Decisions of the new banking supervisory body will be by majority voting. How will the members vote? For their states to put their hands in the pot and extract as much as possible. What will this do to improve banking discipline? Very little. After all, it does not matter if a bank fails, it will simply be bailed out. This is the greatest weakness of the new banking union. Banks should be allowed to fail and go out of business. However in the new big happy EU family no bank, no institution, no company and no person will be allowed to fail. That is reminiscent of the Soviet Union. It collapsed because it rejected capitalism. Under capitalism banks fail. The EU is moving in the same direction. The bad news for the Eurocrats is that the end result will be the same: oblivion.

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