Banking union shift
For most of the year, the biggest question for the euro zone was whether the pace of reform would pick up after German elections which are now just six days away. Thanks to a Reuters exclusive over the weekend it appears the answer could be yes, at least incrementally.
Senior EU officials told us that Germany is working on a plan that would allow the completion of a euro zone banking union without changing existing EU law. Until now, Berlin has insisted the EU would have to amend its Treaty to move power to close or fix struggling banks from a national to a European level – a process which could take years.
In exchange, a cross-border resolution agency would only rule over the fate of 130 euro zone banking groups that will be directly supervised by the European Central Bank from the second half of 2014. That would leave Germany’s politically sensitive savings banks under Berlin’s control.
This is potentially huge. With the ECB effectively underwriting the bloc’s governments with its bond-buying pledge, a cross-border body to restructure or wind up failing banks would do the same for the financial sector. That might finally break the “doom loop” of weak banks and sovereigns weighing on each other, which exists as long as only national backstops are in place.
The resolution fund is to be financed by banks themselves, but until enough money is accrued through their contributions, the euro zone’s ESM rescue fund could lend to the fund to be repaid later, ECB board member Joerg Asmussen said on Friday.
Let’s not get carried away though. This doesn’t mean Angela Merkel, in a third and probably final term, will feel liberated. The triple lock of parliamentary sovereignty, hostile public opinion and a vigilant constitutional court will continue to limit Germany’s willingness to share more European liabilities. That holds true whatever stripe of coalition Merkel is leading – in tandem with the centre-left SPD or free market Free Democrats (FDP).
The CSU, sister party of her CDU, swept to victory in a state election in Bavaria on Sunday but the FDP, with whom she governs in a centre-right coalition, slumped to just 3 percent, below the 5 percent level needed for assembly seats.
Merkel has a history of moving slowly and cautiously but she has certainly moved over the past three years. Perhaps the most important unknown is how driven she is by what the history books will write about her legacy as a leader of Europe, not just Germany.
Mario Draghi heads a cast list of ECB policymakers speaking today and we’ll also hear from the Bundesbank’s vice president.
Yves Mersch is already out trying to convince that the Federal Reserve’s likely move to start winding back its money-printing this week does not mean the ECB is about to shift tack. The ECB is not in an exit trajectory so money markets shouldn’t get “excessively exuberant”, he said, warning that the central bank had options to halt rising market rates which he chose not to specify.
The key point is to what extent any central bank can decouple from the monetary policy shift undertaken by the dominant one in the pack.
The EU/IMF/ECB troika begins its latest review of Portugal’s bailout and a separate IMF team arrives in Madrid to begin its fourth review of Spanish banking reforms.
Portugal has had a weird summer, surviving an utterly self-inflicted political crisis which threatened to end the coalition but has resulted in the prime minister staying in place with his deputy from a rival party, Paolo Portas, in charge of negotiating with the troika. On the plus side, the economy posted startlingly strong second quarter growth of 1.1 percent.
Portas has been responsible for some strikingly anti-bailout rhetoric in the past and has said the budget deficit goal set for next year should be 4.5 percent of GDP rather than the 4 percent agreed with the EU. Brussels’ initial reaction was that what has been agreed should be stuck to and signals from the ‘troika’ suggest Lisbon may struggle to get any easing of austerity.
Under the bailout agreement it is supposed to slash around 4 billion euros in spending next year. The blocking of a number of austerity measures by the constitutional court in Lisbon has complicated the government’s task considerably. The review is likely to take about two weeks. It’s possible a precautionary lifeline to replace the current bailout programme could be discussed.