It has been a pleasant surprise the recent statement by German Finance Minister Olaf Scholz in the Financial Times, announcing that Germany is ready to discuss on a new basis the proposal of a European banking union, after having refused to approach the matter for a long time. What has motivated this turn? By Scholz´s words, it seems that the motivation has more to do with political concens. Germany is losing allies in Europe, largely because of its stubbornness in matters like this. The isolation will worsen when it loses a traditional ally after Brexit. On the geoeconomic level, Europe is going to lack of a powerful financial center after the City of London detaches from the EU. As if this were not enough, the large European banks such as Deutsche Bank or BNP Paribas are rapidly losing market share in the global financial businesses. All this shatters the old dream of a Europe with a strong currency and a world-class financial industry that would allow it to sit on the table with the USA or China. Without a unified financial system, that dream can hardly be realized.
The apparent unlocking of this issue by Germany revives the hope that a crucial piece of the EMU architecture will finally be addressed. Almost everyone agrees, even the Germans, that without a banking union the euro will not have stability. No matter how diverse the root causes are for a country to enter into crisis, the destructive final outcome will always take the form of a financial and banking crisis. A banking union with EU-level safeguards would take away from the crisis its main explosive charge.
The EMU has made progress since the crisis of 2010-2012 in two of the three pillars of a banking union: a common supervision system and homogeneous mechanisms for the resolution (management) of bank failures. However, the third pillar is still missing: a public deposit guarantee to avoid panic situations when the system falters. This is where Germany and its north European peers have been dragging their feet. They flatly refuse to take risks and burdens of their undisciplined southern partners. They have drawn an irreducible red line: that each country assume the costs of the irresponsibility of its governments and banks. If the weakest members of the monetary union want to enjoy a common deposit guarantee, they will have to reduce their risk levels first. One could ask what is wrong with that approach. Nothing, in principle, as long as countries are isolated entities. But if they are part of a monetary union, the collapse of a country’s financial system would inexorably lead to their exit from the union or to the other members having to come to their rescue. Only some community support or guarantee scheme would prevent bank instability from wreaking havoc and breaking up the monetary union.
The fact that Olaf Scholz has put the issue on the table is certainly a positive step, but let’s not discredit optimism. To begin with, we do not know if Minister Scholz speaks on behalf of the ruling coalition SPD-CDU / CSU or rather on a personal basis in the context of his struggle to be elected head of the SPD. Second, Germans are not prone to drastic policy changes and Minister Scholz is no exception. He has tied his proposal to conditions that basically reflect that the German position has hardly changed. He insists again that before sharing risks, these must be reduced (or disappeared). He does not want, for example, that banks have in their balance sheets too much of sovereign debt of their home countries, something that countries such as Italy, Spain and France have always flatly rejected. He also does not want the European deposit guarantee to be in place before the of southern European members reduce the legacy of bad loans left by the last crisis.
Nor is the proposed guarantee scheme properly a “common” one. First, national guarantee funds would have to be exhausted before resorting to the common funds and these would be granted as loans to the country whose banks are in trouble. As was demonstrated in the past crisis, placing the burden of bank bailouts on the shoulders of the affected countries would put them in a position of insolvency in the eyes of the financial markets, which would then turn the banking crisis into a twin crisis of banks and sovereign debt. Suffice this couple of remarks to set foot on the ground regarding an issue that still has a long and arduous road to go.