Italy should spark serious, final debate on banking union


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A time of crisis is a time for action. At last.

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The ever-elusive finalization of banking union is a serious black mark against the European Union’s ability to get meaningful business done. It is way past time to get serious about it, and the chaos coming out of Italy should reignite and give immediacy to a discussion about practical ways of getting banking union finalised.

The good news: Angela Merkel, head of the state most viscerally against sovereign risk-sharing via a European deposit insurance scheme before the European non-performing loan problem is solved, was reported to have agreed with other EU heads of state to have a proposal ready by the December summit. The bad news: Something like this is said by top European officials every year. Despite progress, there are still more than €250 billion in Italian NPLs, so any anti-risk sharing attitude will not have weakened. 

It may be true, as European Commission director general Olivier Guersent said this month, that Europe will simply need another crisis before it makes completing banking union a real priority: a crisis big enough to scare officials into action but not big enough to kill the union.

But this is a depressing thought.

Italy’s situation is not improving; for the first time in the EU’s history, a government budget has been rejected by the European Commission. Italy’s banks are practically locked out of the funding market and Italian government securities (BTPs) are trading at a spread well north of 300 basis points, putting further stress on weaknesses in the banking system. The carry trade that has been keeping BTP yields relatively steady in turbulent times, like the 2018 elections, is gone, according to market participants.

With Italy’s minister of economy and finance, Giovanni Tria and the country’s premier saying BTP levels aren’t sustainable and Matteo Salvini, the deputy prime minister, saying the proposed budget will not be changed by “one euro”, things are getting bleaker by the day.

Merkel has said that she and other EU leaders are “determined” to have a banking union proposal that “says something about the roadmap” to a deposit guarantee – hardly a concrete commitment.

The idea of sovereign risk weightings has by and large been tossed out as unworkable. But last year, think-tank Bruegel proposed introducing sovereign risk concentration caps, about which not much has been said since. These would include limits to the amount of exposure a bank can have to each sovereign’s debts.

The events in Italy should be the final impetus to take up a practical discussion about such an approach.

Guersent’s crisis moment may be arriving soon. Let’s hope it’s not the kind that kills.