Can the banking union help Eurozone counter its imminent threats?

The completion of European Banking Union project last month, the most important undertaking of the EU after the introduction of the common euro currency, is undoubtedly the result of a long negotiated compromise, and as such it has many drawbacks. Firstly, it doesn’t recognize the fact that Eurozone’s mega-banks were the main culpable party for the 2009-2010 financial crisis in Europe, which started in May 2010 with the Greek breakdown, and secondly it leaves unanswered the question ‘now what’. Nevertheless, the EBU constitutes a major achievement without which Eurozone could not confront fatal stalemates in the future in the event of new financial perturbations. Capital markets, with their built-in eagerness for short term profit, have celebrated the achievement of the EBU, pouring billions into European debt paper, which investors didn’t touch at all only months ago. Even the Greek banks and the county’s sovereign, the most vulnerable security issuers of Eurozone, have managed to attract around €10 billion so far and more is on the way. Of course, capital markets are abandoning their placements with the same swiftness as they go for them. Some investors though went as far as to guarantee a time horizon for their newly acquired participation in the equity of three Greek systemic banks. At the same time, the borrowing cost for the sovereign debt issuers of Italy and Spain have almost reached the before crisis levels, giving the Rome and Madrid governments a lot of breathing space. Again, as noted above, capital markets are highly volatile. But it seems that in all these cases of private capital placements in the south of Europe, it’s the long term investors, like pension funds, who set the pace. It’s the long term kind of investment that is currently taking place in the south Eurozone. This is quite a positive sign. The political dangers The truth is that everybody is counting on the growth prospects of Eurozone. The main idea is that there is no more room for economic slippage in Europe. The entire south is thought to have reached the bottom of the curve, while the core countries show ability for a stronger recovery. However, if those prospects prove to be fallacious the situation will change dramatically. There are more gray spots in the European horizons though. The outcome of the 22-25 May European elections is one of them. Everybody predicts a stronger electoral showing of Eurosceptic and extremist parties in the next legislative. The question is how extended this change will be. In political and social matters the weight and the extent of the changes may bring about a quality variation. If the strength of the three major European Parliament parties (the European People’s Party, the Party of European Socialists and the Alliance of Liberals and Democrats for Europe) is drastically reduced below the current 72% solid majority, the EU could be in trouble. As the European Sting writer George Pepper observed recently “without the consent of the Parliament, the EU’s law making machine is blocked. However, the rise of Eurosceptic right-wing political parties like Nigel Farage’s UKIP in Britain, Marine Le Pen’s Front National in France and the Fidesz party of Viktor Orbán in Hungary may derail the traditional cooperative attitude of the legislature vis-à-vis the other two decision-making bodies of the EU, the Commission and the member states’ Council”. A weak Banking Union Another huge dark spot in Europe is Ukraine’s map. The south and the east of the country had been driven by the West and Russia confrontation into a real civil war, with scores of fatalities. There are indications that the two sides have decided to continue on the line of all-out confrontation, aimed at partitioning the country in a loose federal scheme. If this is the case, the process may prove to be explosive and both the EU and Russia may be called to pay a high cost, not to say anything about the poor country itself. There is no doubt that the post-election Europe may prove to be a difficult place. The European Banking Union will be a rather weak tool to help Eurozone confront the eventual future woes, that may arise from the ballot box or the planes and cities of Ukraine. As things stand now, only the European Central Bank can act as a truly European agent and help Eurozone effectively counter its negative eventualities.