Bill Jamieson Waiting for the German watershed

COMMENT

BILLJAMIESON | Executive Editor of The Scotsman

Waiting for the German watershed

With the German elections out of the way, will the EU forge ahead with banking union? Probably not.

Sunday September 22 is the date ringed in red across the diaries of Europe. This is the date of the German federal election, widely regarded as a watershed event. Some are minded to view this as the trigger for long-delayed progress towards banking union, and it is likely to be preceded by improving news from the eurozone’s stricken economies. A date, then, to which we can look forward with hope.

But there is another view. The weeks before the vote will be the calm before the euro crisis re-emerges, and with unsparing fury. Which view will prevail?

Since June of last year, when a banking union was first mooted, a comatose calm has settled over grandiose plans for Genuine Economic and Monetary Union. Under this, national taxpayers would no longer be on the hook for the debts of their countries’ banks. Instead, there would be an arrangement by which the costs arising from bank failures would be somehow spread across the euro zone. Note the word ‘somehow’. It has so far defied all attempts at definition.

Soothing rhetoric has emanated from those charged with bringing these plans to fruition – senior officials at the European Central Bank; Hermann Van Rompuy, the president of the European Council and sundry high powers at the European Commission. Banking union, went the cry, was the key to underpinning the euro and everything it represents. Yet for all the rhetoric, little progress has been made. Accelerated integration remains the radiant ambition, the rainbow across which Europe would progress to a political and economic Valhalla. Unfortunately for the project’s promoters, every time the financial and political implications are considered, the end of the rainbow slips further from reach.

‘Club Med’ governments are ferociously resistant to the loss of control over their banking systems. Germany and northern European countries are bent low with bail-out fatigue.

Agreement has been reached on a plan for a Single Supervisory Authority, with the aim of having this in place by end 2014. But where is the meat in the sandwich – the entity, or cluster of entities, to be supervised? No progress has been made on this central issue.

Governance of the eurozone is effectively moribund, with debt-stricken member states determined, despite the hardships and the strangling strength of the common currency, to remain in the club in the hope of bail-out support, and a sulphurous reluctance among northern members to provide anything of the sort until the keys of banking supervision and sovereignty are handed over.

‘Club Med’ governments are ferociously resistant to the loss of control over their banking systems. Germany and northern European countries are bent low with bail-out fatigue.

Muddling on

“It is reasonable to assume,” says Arbuthnot Securities economist Ruth Lea, that “this will remain the case… In other words, it is difficult to envisage further major integrationist steps in the eurozone, especially if they have financial implications… As a central case we believe that the eurozone will continue muddling through for the foreseeable future.”

Muddling through – with years of solid practice eurozone leaders have certainly turned this into a high art. Can it be sustained?

A major practical problem is that any central authority would need to have an emergency bail-out fund to hand, and this would have to be funded by contributions from participating banks. But it would take considerable time for reserves to be built up in this way and payments could result in a diminution of funds for member banks to boost business lending and thus growth prospects.

But a bigger issue is its constitutional propriety: Germany insists it would require a treaty change – and that is unlikely to go down well with other eurozone members who bristle at the notion of Germanic style oversight enshrined in law. The inescapable reality is that national banking systems are central to a country’s self-definition and strategically vital to its economy – even more so, the economist Stephen Lewis argues, than the coal and steel industries where the international pooling of control was the basis for the EU.

“Without control of its own banks,” he says, “a government cannot be master of its own economy. It seems very unlikely any member state would tolerate the Commission’s closing down a bank that dominates its economy, without the final word remaining with its national government. Yet, if a national government is allowed to share with other eurozone countries the costs of resolving the problems facing its banks, its partners may have no means of defending themselves against open-ended demands for financial support.”

What many Germans fear, and what is likely to colour arguments in the run-up to those elections on September 22, is that the risks to which they may be exposed by joining the proposed banking union would be so great as potentially to undermine their commitment to the euro arrangements in their present form. Chancellor Angela Merkel, to underpin her re-election prospects, may well be under pressure to give firm assurances that she will not agree to accepting such risks. The period between now and the elections is thus likely to be less a prelude to progress as optimists hope, than a lull before yet more euro storms. n