Sunday, September 30, 2012

Welcome back to the eurozone crisis

by Wolfgang Münchau

Financial Times

September 30, 2012

Have you noticed that the half-life of eurozone optimism is getting shorter? It was only three weeks ago that Mario Draghi, the European Central Bank president, announced his outright monetary transactions, a programme of sovereign bond purchases with no upfront limit. It seemed that the consensus was that this had either ended the crisis, or its acute phase.

Last week investors – and Spanish journalists – suddenly discovered to their horror that Germany will not after all allow Spain to dump the risk of its banks on to the European Stability Mechanism, the eurozone rescue fund. That seems to contradict the June 29 eurozone leaders’ summit statement, which said it was “imperative to break the vicious circle between banks and sovereigns”. EU leaders reached this agreement in the early hours of the morning after a diplomatic ambush by the Italian and Spanish prime ministers. Whatever may have been agreed that morning, it was understood differently in Spain than in Germany. The Spanish interpretation had been that the EU would adopt a banking union by the beginning of next year. This would then automatically trigger a shift in the burden of the recapitalisation of the Spanish banking sector from Spain to the ESM.

This is not how Angela Merkel, the German chancellor, and Wolfgang Schäuble, her finance minister, understood the deal at all. Over the past few days, they clarified what kind of banking union they want. This is how I would summarise the German position:

First, we do not really want a banking union all, but if we have to have it, we would like to limit the remit of the pan-European supervisor to a few large cross-border banks.

Second, ideally the supervisor should not be the ECB; if it has to be the ECB, there must be safeguards, stronger than those proposed, to ensure that monetary policy remains independent from the banking supervisor.


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