German caution will make banking union stronger

 Germany’s finance minister says that a pan-European bank resolution scheme requires changing the EU treaty. This is less an attempt to delay the banking union than a statement of fact. It does not impact the common bank supervisor, nor direct recapitalisation through the ESM.

 German Finance Minister Wolfgang Schaeuble is Europe’s leading doom monger, regularly throwing cold water on ideas or suggestions to amend the way the euro zone does business. He seemed to live up to his reputation over the weekend by pointing out that full European banking union, including a resolution scheme, would necessitate changes in the EU’s founding treaties.

Banking union is not highly popular with the German public. Amending the EU’s legal framework is an intricate process requiring unanimous consent among 27 member states. It would not only take some time, but create political risk as well. In a few countries, it would require approval by referendum. So it is tempting to see Schaeuble’s statement as an attempt to delay the project indefinitely. That would be a misleading interpretation.

First, he raises no objection to the plan to make the European Central Bank the monetary union’s joint banking supervisor. The creation of the “single supervisory mechanism” is a precondition for the direct recapitalisation of ailing banks by the European Stability Mechanism – the euro zone’s bailout fund. Important details still have to be sorted out, but that process is well under way. The ECB should be able to take on its new task in July, 2014. Then the direct recapitalisation of banks through the ESM could take care of the most pressing problems of the currency union.

Second, governments haven’t yet started to negotiate the next stage in building a banking union – common rules on how to shut failed banks. That will not be easy. It potentially involves the use of billions of euros of taxpayers’ money, as well rules on how to force losses on the banks’ owners and bondholders and how to sack employees. Schaeuble is right to insist that such decisions must be based on a watertight legal framework or else they’ll be ripped apart in the courts.

A treaty change is the only way to achieve this. Rather than unnecessarily delaying the resolution mechanism, the German finance minister has just pointed out what is needed to make this successful. Besides, he is merely stating aloud what other euro zone governments know all too well.

This article was initially  published as a Reuters Breakingviews comment on 15 April 2013.

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