The European Banking Union: an unfinished ambition, a reflection of the European construction

, by Théo Boucart, Translated by Lorène Weber, Translated by Martina Kubicová

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The European Banking Union: an unfinished ambition, a reflection of the European construction
The European Central Bank, in Frankfurt, Germany. CC - Thomas Hassel

In a previous article, I wrote about the outcomes of the European Banking Union (EBU), this “federalist leap” welcomed by some and feared by others. Regarding the technicity of the text, I’d like to clarify the subject by giving my opinion on this EBU or more likely on its operational elements.

Let’s remind it one more time, the banking union was created in order to break the link between bankruptcy and sovereign risk. This relationship was stated in an obvious way in 2010, as many states that had saved their banking system with thousands of billions of euros found themselves in debt, sometimes until economic strangulation.

In 2012, at the height of the slump of the Eurozone, Spain asked for help to save its banks. The idea of a banking union then emerged (again) from Brussels. Its purpose was to avoid a new financial and economic crisis and to fight the banking fragmentation of the Eurozone. It seems that one never moves forward as well as back to the wall.

The EBU, although presented as a remarkable advance, is only a shaky and incomplete construction, symbol of the national ratios of power crystallized in the economic area by the Franco-German mano a mano. Actually, the banking union is also an almost perfect image of the construction of the Eurozone or even of the European construction as a whole. However, its necessity is such that it will have to be completed someday. The main question is whether this completion will occur in time to avoid the next systemic crisis.

The current EBU, or the less and less accepted method of small steps

History will remember that banking union became a reality in Europe on 4 November 2014. But let’s not forget that only its first pillar, the Single Supervisory Mechanism (SSM), was implemented at that time. The ECB is supposed to oversee the largest banks of the Eurozone, but only 85% of financial assets are concerned. The remaining 15% are out of its control, partly because of Germany’s categorical refusal to give up control on its powerful Sparkassen (German saving banks). The SSM is therefore incomplete and lacks legibility.

What about the other two pillars then? The Single Resolution Mechanism (SRM) is both indigent, with a single resolution fund of only € 55 billion operational in... 2023, and inefficient because the states whose banks seek help prefer intervening rather than making shareholders and depositors pay. The European Deposit Insurance Scheme (EDIS) is still stuck in the twists and turns of the negotiations between Member States and will be implemented very gradually.

The EBU is therefore an incomplete project, in an incomplete euro area, in an incomplete European Union. The example of the functionalist method is here eloquent. This way of doing things certainly worked at the beginning of the European construction, but it is clear that this is no longer the case today. The EBU cannot afford to operate without a European deposit guarantee, just as the single currency can no longer dispense with a coherent policy mix, nor the EU with a single market, without significant progress towards a political union. Small steps cannot be effective in times of crisis, we must take the risk of being ambitious. “Audacity, more audacity, always audacity, and Europe will be saved,” Guy Verhofstadt once said, paraphrasing Danton.

The EBU, theatre of the sad lack of European solidarity

The gradual construction of the banking union teaches us that, besides the tough debates within the Parliament and the Council, the lack of solidarity within the euro area has not disappeared as a result of the sovereign debt crisis. I will not be insincere by saying that Germany has not moved an iota from its anti-solidarity stance (it has changed a lot since 2010, otherwise the euro would be dead and buried), but the EBU is the opportunity for Germany to remind that it will not pay the PIGS’ inconsistencies (Portugal, Italy, Greece and Spain) in the matter of banking.

The EDIS bears the consequences of national egoisms, especially Germany’s inflexible position against the will of France and Italy to quickly establish the banking union’s last pillar. Solidarity is, however, the absolute precondition of an economic and financial union. The lack of solidarity can have catastrophic consequences in the event of an asymmetric shock. The current banking union will not be able to prevent the next banking crisis, perhaps already announced by the worrying state of the Italian banking system. Germany and the Bundesbank must not forget either that they take advantage of capital flight from peripheral countries, via the balances of the TARGET 2 system. Building a complete and coherent banking union is, therefore, in everyone’s interest.

The EBU must be the subject of a second “Cecchini report”

Can the banking union be part of the revival of the European project? Showing the costs produced by an absence of effective EBU could move things along. Just as the Cecchini Report of 1988 had shown the colossal costs of the common market’s imperfections, a new report on the costs of the “non-EBU” should be drafted. Without even having precisely calculated these costs yet, they seem to be enormous: financial fragmentation bringing about differences in funding conditions that affect investment in certain countries, risk of chain bankruptcy of financial institutions, etc.

We must not be afraid to be “ayatollahs of federalism”, to take the ironic words of Hubert Védrine. We must demand a complete European Banking Union in a complete euro area. The European Union will then have the impetus to move towards the political union.

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