Friday, July 6, 2012

Europe’s banking union: Possible next steps on a bumpy path

by Nicolas Véron


July 6, 2012

For many, Europe’s latest summit on 29 June effectively promised a banking union. This column praises the move but argues that this remains just a bare bones promise and the details are yet to be fleshed out. In the short term it calls for a temporary task force, akin to that used by the US for its auto industry in 2009, to help Europe’s failing banks.

In their summit statement of 29 June, the heads of state and government of the Eurozone issued a declaration widely interpreted by investors as the founding act of a European banking union, about which European policymakers have been increasingly vocal over the past two months or so. Their commitment remains little more than a promise, with multiple caveats. But Europe’s leaders will now renege on this promise at their peril. The general perception is that an irreversible step has been made, with vast consequences that will unfold only gradually.

“We affirm that it is imperative to break the vicious circle between banks and sovereigns,” the heads of state and government declared (Eurozone Leaders, 2012). “The [European] Commission will present proposals on the basis of Article 127(6) [of the Treaty on the Functioning of the European Union] for a single supervisory mechanism shortly. We ask the [European] Council to consider these proposals as a matter of urgency by the end of 2012. When an effective single supervisory mechanism is established, involving the ECB [European Central Bank], for banks in the Eurozone the ESM [European Stability Mechanism] could, following a regular decision, have the possibility to recapitalize banks directly.”

The key commitment in this clumsily worded half-paragraph is less the “single supervisory mechanism”, which can be interpreted in multiple ways, than the direct involvement of the ESM under a clear deadline of end-2012, meaning that the Eurozone fund would intervene into individual banks without having to rely on national authorities as intermediaries.


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