Crisis diplomacy in full swing
Merkel resists plans for banking union.
Country issues
Another crucial month for the euro
G7 finance ministers stress global fragility
The leaders of European Union member states will gather in Brussels in three weeks’ time knowing that the eurozone’s sovereign debt and banking crisis is worse than at any time since Greece was first forced to request a bail-out in May 2010.
A month of what will be almost non-stop crisis diplomacy started on Monday (4 June) when Angela Merkel, Germany’s chancellor, hosted José Manuel Barroso, the president of the European Commission. That meeting was followed 24 hours later by a conference call involving the finance ministers of the G7.
Germany is pushing for closer integration of eurozone policy but is sceptical of other proposals on the table such as Eurobonds – the pooling of eurozone debt.
Merkel is also unconvinced by plans for a ‘banking union’, which like Eurobonds are promoted by the European Commission and France, because she fears losing control of the supervision of the German banking sector. Any attempt to use German tax-payers’ money to fund pan-EU bank resolution schemes is likely to meet even greater opposition.
France, conversely, is wary of the loss of sovereignty that would follow fiscal integration and the transfer of some power over national budgets to the EU. However, Merkel said on Saturday (2 June): “You can’t ask for Eurobonds, but then not be prepared to take the next step towards closer integration.”
In a sign that the eurozone’s problems are not confined to its periphery,
Moody’s, a credit-rating agency, yesterday (6 June) downgraded the creditworthiness of six of Germany’s banks and three in Austria. “Today’s rating actions are driven by the increased risk of further shocks emanating from the euro-area debt crisis,” Moody’s said.
Bank resolution
While there is immediate pressure on the eurozone’s banking system, draft legislation outlined yesterday by Michel Barnier, the European commissioner for the internal market and services, will only deal with longer-term problems. The Commission’s proposal for new bank crisis-management measures is intended to avoid the need for taxpayers to bail out financial institutions in future.
Barroso said that the proposals were “an essential step towards banking union in the EU”. Sharon Bowles, a British Liberal MEP who heads the European Parliament’s influential economic and monetary affairs committee, described the proposals as “long overdue”. Barnier admitted that he had been “ready for months”.
The Commission’s proposal would give national banking supervisors the power to force losses on bondholders, while national bank resolution schemes would work more closely together and countries would be required to come up with resolution plans for banks in trouble.
British fears
However, even if member states and the Parliament can approve the plan swiftly – and this is far from certain, most notably because the UK is reluctant to lose any control over its financial system – it is unlikely to become law before 2015, far too late to solve the current crisis.
Nicolas Véron, a senior fellow at Bruegel, a Brussels-based think-tank, said that “systemic fragility” in Europe’s banking sector had been revealed as early as 2007 but had not been properly addressed despite a series of “stress tests”.
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“Many academic observers now agree that a banking union, together with some form of fiscal union, is a necessary condition for a sustainable eurozone monetary union and for a resolution of the current crisis,” he said. “The current moment calls not for perfect fine-tuning, but for swift and bold commitments.”
Gilbey Strub, a managing director at the Association for Financial Markets in Europe, said that “de-linking the sovereign from the bank is essential”.