ANTALL JÓZSEF RESEARCH CENTRE
AN ASYMMETRIC BANKING UNION AND EUROPEAN POWER POLITICS
KRISZTINA ISZÁK
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ANTALL JÓZSEF RESEARCH CENTRE
AJRC-Analyses Series of the Antall József Knowledge Centre
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© Krisztina Iszák, 2021 © Antall József Knowledge Centre, 2021 ISSN 2416-1705
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AN ASYMMETRIC BANKING UNION AND EUROPEAN POWER POLITICS KRISZTINA ISZÁK
INTRODUCTION Amidst the heights of the eurozone debt crisis, the European Union (EU) announced the creation of a banking union with the main goal of eliminating the interdependence between banks and their sovereigns. The banking union counted as a major response to the emerging sovereign debt crisis. Contrarily to the originally envisaged structure,1 a three-pillar framework was negotiated with eventually only two pillars implemented. Main elements of banking supervision and resolution were moved to the supranational level expanding EU competences in the financial system. On the one hand, this represented a remarkable step towards deeper integration in the Economic and Monetary Union (EMU).2 On the other hand, both the scope of supervision and resolution turned out to be limited compared to the plans in the “Four Presidents Report.”3 Furthermore, neither a deposit insurance scheme nor a common fiscal backstop was agreed. Despite these, the banking union contributed to greater financial stability and healthier bank systems while also enhanced financial integration in the EU. The downside is, however, that this incomplete structure created asymmetries across the eurozone.4 Adding to its complexity, the already multi-layered system of financial regulation was complemented with a new eurozone level both in supervision and resolution.5 Moreover, the framework further deepened the North-South divide with significant disadvantages for Southern Member States (MS). Up to this day, the banking union remains unfinished with negotiations on its third pillar reaching a standoff. Additionally, in spring 2020, the COVID-19 pandemic hit the bloc of 27 and it is still ongoing creating economic difficulties on multiple levels. Due to these the eurozone bank systems experience a déjà vu especially in Southern MS. Therefore, this paper aims to understand why the banking union functions asymmetrically in the eurozone. By taking a realist institutionalist approach, it will be argued that this asymmetric functioning flows from an incomplete banking system set
Herman Van Rompuy: Towards a genuine Economic and Monetary Union. renesmits.eu. 5 December 2012. <http://renesmits.eu/Van%20Rompuy%20Report%2006-12-12.pdf > Accessed: 8 January 2021. 1
2 Marius Skuodis: Playing the creation of the European banking union: what union for which Member States? Journal of European Integration. 2018/1. 99-114.
Herman Van Rompuy.
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Lucia Quaglia: The politics of an ‘incomplete’ Banking Union and its ‘asymmetric’ effects’. Journal of European Integration. 2019/8. 955-969.
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5 Jörn-Carsten Gottwald: The merits of adaptive governance: the regulation of financial services in the European Union, in Hubert Zimmermann and Andreas Dür (eds.). Key Controversies in European integration. London, Palgrave, 2018, 2nd edn. 159-167.
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up through power politics. It is also assumed that future developments of the framework are subject to possible path-dependence for the same reason. Realist institutionalism has long been applied by scholars of international relations. This approach holds that powerful actors aim at setting up an international order which favours their interests while forcing less powerful states to adjust. In the context of the banking union negotiations, this suggests that the functional need for more supranationalism has been ignored— the preferences of financially more powerful countries prevail without adequate fiscal transfers that would restore financial stability. Thus, the outcome of the negotiations is a compromise that results from power politics.6 The eurozone crisis revealed a clear divide between creditor and debtor countries within the eurozone with the latter being in severe financial trouble. Although it is argued that the set-up of EMU has already contributed to this divide, the sovereign debt crisis further worsened the situation of Southern countries. The analysis points out that negotiating a banking union through power politics also resulted in a structure that favours certain MS (especially Germany) over others along the North-South line. The analysis is divided into three parts. The first introduces why the banking union was created and examines its three pillars while looking at latest developments. The second part continues with investigating how the banking union functions. The research shows that due to the inappropriate institutional setting of the eurozone, the lack of fiscal discipline and that of structural reforms at national levels a creditordebtor divide had evolved. Furthermore, asymmetries and imbalances are identified in the functioning of the banking union further contributing to an economically weaker situation of Southern MS. Building on the first two parts, the third section analyses the role of power politics by looking at the way the pillars of the banking union were set up. Contrasting them with their results provides useful insights into their effects on the banking union’s functioning. The assessment of the underlying power relations also contributes to the understanding of possibilities for future reforms and the outcomes in their negotiations. The paper concludes that an incomplete banking union was established through power politics favouring certain countries, such as Germany. The supranationalisation in the banking system is limited and created fragmentations. While the EU level supervision and resolution resulted in positive developments, there is much room for improvement. Relevant risk sharing is still missing and remains mainly at the national level which could ultimately undermine the soundness of the banking system.
BANKING UNION—A SAVIOUR IN THE “DOOM-LOOP”? The idea of banking union emerged in earlier times of EU integration albeit with incremental progress. The question of EU level bank supervision was for example raised as a possible competence when the European Central Bank (ECB) was created, but MS strongly opposed the transfer of such power.7
Shawn Donnelly: Power Politics, Banking Union and EMU – Adjusting Europe to Germany. Routledge, Oxon, 2018.
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Skuodis.
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Financial services regulation in the EU took a specific approach following the Lamfalussy process introduced in 2001. While cooperation was strengthened, supervision remained a national competence. After the 2008 global financial crisis (GFC) three institutions were added to stabilise the financial system. Launching the European Financial Stability Facility (EFSF), a temporary rescue fund, and later the European Stability Mechanism (ESM), a permanent agency providing financial assistance, is said to have paved the way for the banking union.8 Moreover, the European System of Financial Supervision (ESFS), has just started providing macroprudential supervision when the eurozone crisis kicked in. This crisis however, revealed the weaknesses of an incomplete EMU. National banking supervision proved to be ill-suited in the otherwise integrated financial system. While the world has started recovering from the GFC, a sovereign debt crisis enfolded in the eurozone with several MS finding themselves in a bank-sovereign doom-loop. In economic terms, this doom-loop refers to a negative spiral between banks and their respective sovereigns. In some cases, the two can be strongly interdependent through sovereign bonds. A high level of interdependence increases the possibility of a scenario where a weak sovereign could bring down a weak bank and vice versa. Figure 1 illustrates this feedback loop and shows how this interdependence between sovereigns and banks could threaten the integrity of a financial system. Figure 1. The feedback loop between banks and their sovereigns
Source: Markus K. Brunnermeier et. al.9
8 Desmond Dinan: The EU as efficient polity, in Hubert Zimmermann and Andreas Dür (eds.). Key Controversies in European integration. London, Palgrave, 2018, 2nd edn. 30-37.
Markus K. Brunnermeier et. al.: The Sovereign-Bank Diabolic Loop and ESBies. American Economic Review: Papers & Proceedings. 2016/5. 508. 9
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