United on banking union?

November 11, 2013

Reuters reported over the weekend that Angela Merkel’s Conservatives and the centre-left SPD had agreed that a body attached to European finance ministers, not the European Commission, to decide when to close failing banks.

At the risk of blowing trumpets this will make the euro zone weather in the week to come and could open the way for agreement on long, long-awaited banking union by the year-end.

Up to now, Berlin has chafed against the European Commission’s proposal that it should be in charge of winding up banks and the path to a body to act on a cross-border basis looked strewn with obstacles.

The compromise stems from a meeting between Wolfgang Schaeuble, his party colleague Herbert Reul and top SPD politicians Peer Steinbrueck, Martin Schulz and Olaf Scholz, so it has weight.

And yet … the negotiations throw up further problems. The sources in Berlin also told us an SPD demand that the euro zone’s ESM rescue fund would not be used to close banks was agreed to, so a common backstop for what is called the Single Resolution Mechanism – as demanded by the European Central Bank – could be years away. The plan is for banks to pay slowly into that fund.

In the meantime, national governments look like the last backstop and only if they can’t meet the bill could they turn to the ESM for sovereign help in the form of loans. That will carry conditionality and a whiff of stigma, and will have to paid back further down the line, so the doom loop of weak sovereigns and banks weighing on each other will not be completely broken for some while.

This would, however, open the possibility, of the ECB offering bond-buying support. This could all be tested once the central bank conducts health tests of Europe’s biggest banks next year.

There is also the EU political structure to consider. The Commission proposed itself as the resolution body because that was the only way to avoid lengthy EU treaty change. Attaching the SRM to the Ecofin council would either require that or a separate intergovernmental treaty like the one on which the bailout fund is based, which could be done more quickly.

With the markets still believing in the ECB’s pledge to save the euro come what may, this is a further plank in the currency bloc’s defences that increasingly look like they will hold firm.

EU finance ministers meet today to discuss the bloc’s 2014 budget. But it sounds like Schaeuble could take the plan to a separate meeting of euro zone, then EU finance ministers on Thursday and Friday. German coalition talks also rumble on. Today, the fourth meeting of a group of 77 negotiators, led by Merkel and SPD leader Sigmar Gabriel, examine proposals from various working group.

EU/U.S. trade talks were held up the government shutdown in Washington but are back on. Officials say the deal could boost economic output by some $100 billion a year on each side of the Atlantic.

Agreeing a deal before the end of 2014 is the goal but there are already problems. France won a battle to leave film and entertainment out of the pact and the United States may tit-for-tat by opting out its shipping industry.

And there are bigger disagreements in the crucial area of financial regulation which the EU wants to be a central part of the deal, whereas Washington is resisting, worried about losing control over its financial industry.

We reported last week that about a quarter of the ECB’s Governing Council spoke out against cutting interest rates, which chief economist Peter Praet proposed and which Mario Draghi helped ram through. Today, the chief doubter – Bundesbank chief Jens Weidmann – speaks in Basel.

Athens continues talks with EU/IMF/ECB inspectors over its bailout programme. The troika is demanding a 2 billion euros hole in the 2014 budget must be filled while the Greek government is balking at any further austerity measures.

The coalition survived an opposition-sponsored parliamentary motion to topple it last night but lost one lawmaker who was expelled after backing the opposition. That reduces Prime Minister Antonis Samaras’s majority to just four.

Slovenia’s parliament will begin debating the government’s 2014 budget. The adoption of the plan is crucial to push on with the consolidation of public finances necessary if the country is to avoid a bailout. The prime minister will link a confidence vote to the 2014 budget vote, which could come late in the week. The acid test comes in the form of bank stress tests which are due to report soon.

Slovene banks are drowning in almost 8 billion euros of bad loans – equivalent to about a quarter of the economy. The government has reserved 1.2 billion euros for recapitalisation of its main banks but analysts believe the tests may show significantly higher capital needs. Ljubljana hopes to avert a bailout by raising taxes, cutting spending and privatisations including telecoms provider Telekom Slovenia.

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