MacroScope

United on banking union?

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.

Stress, stress, stress

The European Central Bank will announce the methodology which will underpin the stress tests of about 130 big European banks next year.

It is caught between the devil and the deep blue sea. Come up with a clean bill of health as previous discredited stress tests did and they will have no credibility. So it is likely to come down on the side of rigour but if in so doing it unearths serious financial gaps, fears about the euro zone would be rekindled and there is as yet no agreement on providing a common backstop for the financial sector.

France, Spain and Italy want a joint commitment by all 17 euro zone countries to stand by weak banks regardless of where they are. Germany, which fears it would end up picking up most of the bill, is worried about the euro zone’s rescue fund, the European Stability Mechanism, helping banks directly without making their home governments responsible for repaying the aid.