Sunday, June 17, 2012
What happens if Angela Merkel does get her way
June 17, 2012
The Bundesbank said there should be no banking union until there is a fiscal union. Angela Merkel said that there should be no fiscal union until there is political union. And François Hollande said that there should be no political union until there is a banking union. They have 10 days to disentangle that knot.
The interesting thing is that all statements are correct in a certain way, but only the French president offered a practical solution; without crisis resolution, there can be no political union. Mr Hollande made a concrete proposal to allow the European Stability Mechanism to inject unlimited equity into banks; allow it to refinance itself through the European Central Bank; and to let the ECB supervise the 25 largest financial institutions. The German chancellor responded, respectively, with Nein, Nein and Ja.
Unfortunately, the 25 largest banks have no bearing on this problem. It is the other banks that matter. Ms Merkel has accepted the weakest and least relevant bit of Mr Hollande’s proposal.
With so many ideas on the table, it is critically important to understand what is required right now. Spain needs an equity injection into its banking system from the eurozone, not through a loan to the Spanish recapitalisation fund. Only when that happens, can Mariano Rajoy, the Spanish prime minister, claim to have nailed the problem and set off to watch the football – an activity at which he excels. And to address Italy’s problem, the EU needs to find a way to lower its interest rates. This can only occur through one of the following three measures: a eurobond; direct bond purchases through the ECB, or the ESM. But Italy is too big to fit under the umbrella, the ECB does not want to monetise debt and Germany is opposed to a eurobond.