Against the tide: Germany complicates union
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Against the tide: Germany complicates union

Germany will dig in its heels about structures that might put it in a minority in decision-making and might expose its taxpayers to unwanted bailouts.

Now the German elections are over and Angela Merkel is set to be chancellor for another four years, albeit probably in a fractious coalition with the opposition Social Democrats, markets will be hoping for action on a number of outstanding eurozone issues. One of the most important is the setting up of a Europe-wide banking union for supervision, resolution and bailouts.

Eurozone governments have set a deadline for December to achieve agreement on this. But investors should be aware that negotiations going on quietly in the background have been tortuous, with no certainty that a deal will be agreed by the deadline. Negotiations about the formation of a German coalition, which might be protracted, are a new complication.

An attempt by European Commission bureaucrats to control the new banking union has been blocked by Germany. As long as there is no explicit new treaty through which Germany can impose its will on how the banking union will function and how decisions by regulatory authorities are put in place, the German position is that the country will not sign up to a deal that might leave it in a minority. Germany is determined not to allow the rest of Europe to gang up against it to impose some banking resolution that involves more contingent liabilities for the German taxpayer, or imposes unacceptable rules on German banks.

In the absence of a treaty, the German position is that there can be no EC or other EU central body where the Germans can be outvoted and no structure in which voting is by simple majority. So there will be no deal on the banking union in December unless the Germans can ensure a decision-making process on banks that would lock in a German veto and prevent others from outvoting Berlin. At first glance, the structures outlined last summer by EU leaders seem to form the crux of a viable banking union, creating the infrastructure to manage both banking supervision and to deal with bad banks. A unified deposit insurance scheme would provide insurance fund(s) to deal with failing institutions. States will have the option of merging deposit guarantee schemes with the planned new resolution funds under the terms of the Banking Recovery and Resolution Directive (BRRD). This would remove a great deal of the horse trading that has marred previous bank bailouts.

But the sheer complexity of the structures makes effective implementation difficult. And leaving the current template for banking resolution on the table until 2018 only adds to these risks. Resolution funds will not be adequate in size until even later than that, kicking effective operation further into the long grass. It is impossible to break the sovereign/bank nexus without all this up and running.


Behind this reticence is the unwillingness of Germany to allow its Länder banks to come under the supervision of a pan-European body. The original proposal for both the single supervisor and resolution authority covered all eurozone banks. Eventually this was watered down so day-to-day responsibility for small banks stayed with national authorities. A similar compromise is shaping up on resolution. This would mean that most of France’s banking system would be in the hands of EU bodies, while most of Germany’s would not. Germany is proposing a loose network of national authorities, with some binding mediation system when there are disputes.

Indeed, Germany would prefer to split the resolution fund. When banks are small and wound up by national authorities, they could rely on national rescue pots. Germany thus retains control over its own sector, while ensuring it is not presented with a bill for small banks in weak eurozone countries. Indeed, it will take some time – perhaps 10 years – to build up the fund through annual levies on banks. In the meantime, funds will have to come from a credit line, perhaps from the European Stability Mechanism. But the ESM is already low in funds after past bailouts. So getting the whole thing up and running is not going to be easy.

David Roche is president of Independent Strategy Ltd, a London-based research firm.

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