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The only solution for the euro: full fiscal and financial union

I’m desperate to be positive about Europe, the European Union, the Eurozone and the European Community.

I’ve been an advocate of Europe to a certain degree, as it’s been my main focal point for over a decade in finance: building the Eurozone, the Single Euro Payments Area, the implementation of MiFID and EMIR, the whole Financial Services Action Plan thingamajig.

I’ve got the t-shirt, the badge, the baseball cap …

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… and even the garden statue and sideboard decoration.

But even I’m reaching the point where you can see this is no longer workable.

The big news is that Draghi and Barroso call for a Banking Union and released 156-page report of what such a union would mean yesterday.

The press release talks through a summary of the details, although I preferred Reuters coverage:

The Commission's 156-page draft legislation suggests giving supervisors powers to "bail in" or force losses onto bondholders of a failing bank so that taxpayers are kept off the hook, and forge closer links between national back-up funds to wind up cross-border lenders.   The law would introduce what an insolvency regime for banks in the European Union.  It would also instruct countries to prepare for a bank collapse, collecting money through an annual levy on banks that would be used in an emergency to provide loans or guarantees.

The European Commission hopes that tighter links between individual wind-down schemes across the European Union will pave the way for a single resolution fund to close or salvage parts of a flagging bank, a key element of ECB President Mario Draghi’s vision.

But, as the Reuters coverage points out, “there are many hurdles to the banking union championed by ECB President Mario Draghi – a three-pillar plan for central monitoring of banks, a fund to wind-down big lenders and a pan-European deposit guarantee.  Germany has balked at signing up to a single European scheme that could see it shoulder the costs of a bank collapse in another country, and Britain fiercely resists any attempt by Brussels to impose EU controls over financial services, which account for almost a tenth of its economy… the impasse between the European Parliament and EU member states in negotiating a separate framework proposed by the Commission in 2010 for deposit guarantee schemes illustrates the obstacles to the creation of a wider banking union.”

It’s also going to be a long time coming …

Berlin is not in a hurry. A government paper seen by Reuters said Germany does not expect Europe to take any final decisions on strengthening economic policy coordination between member states until the spring of next year.

Spring is far too far away for Spain, drowning in €100 billion of bank debt, to be saved.

Equally, I was commenting today on the Bank of Cyprus who, in order to protect UK savers, has spun off its UK subsidiary in order to get coverage via the Financial Compensation Scheme over here.

Cyprus is also drowning in debt – it has over €23 billion exposure to Greece, equivalent to 115% of Cyprus’s annual GDP – and there are genuine concerns that this tiny island may need a bailout too.

That’s a bit embarrassing as Cyprus takes over the EU Presidency in July.

None of this sits well with me anyway when you hear that Angela Merkel is brokering a deal for EU leaders to put the largest banks of the 27 member states under direct European supervision.  The UK would never agree to such a deal and yet it is what’s needed if the Eurozone is to continue.

The bottom-line is that you have a European Union that has been trying to move for fifty years towards a single trading area.

The Maastricht Treaty of 1992 opened up an Economic & Monetary Union (EMU) but you cannot have such a Union without a fiscal and financial union, as it turns out.

However, a fiscal and financial union is untenable to many of the 27 members of the current Union.  Giving up their banking and financial sovereignty to an authority most likely based in Frankfurt might work for Athens or Madrid, but not for London or Stockholm.

Therefore, this leaves a choice of the 17 Eurozone countries to try to cope with the haemorrhaging Eurozone whilst the other ten look-on.

These non-euro countries will then consider whether to be part of a Eurozone (17 countries today), which is unlikely; or stay as part of the European Union (ten countries today), which may be difficult if they do not commit to support the Eurozone; and hence these ten are forced to potentially switch to token support of the European Community (the other four countries that form the Extended Economic Area today).

What is likely is that we will end up with far more countries in the Community, becoming part of the EEA, than in the Union.

This is something that Lord Owen, a major EU advocate in the UK, is now proposing for Britain and is a sign of things to come.

Either way, until the Eurozone forms a proper and fully fledged monetary union that covers their tax and banking sectors as well as their currencies, this thing ain’t gonna work.


About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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