Italy’s Letta: A European Banking Union soon or Eurozone collapses

José Manuel Barroso, President of the EC, and Olli Rehn, Vice-President of the EC in charge of Economic and Monetary Affairs and the Euro, participated in the Bureau of European Policy Advisers (BEPA) conference on “The blueprint for a deep and genuine EMU (Economic and Monetary Union): Debating the future economic, monetary, banking and political union” with Jean-Claude Thébaut, Director General of the BEPA. (EC Audiovisual Services).

While the European Council of the 27 EU leaders has only ‘energy’ and ‘taxation’ in its agenda today, with poor results expected on both accounts, the hot issue of the European Banking Union will probably consume most of the time in the side meetings. The enactment of the EBU has become now the main point of friction between the two Union’s camps, the ‘austerity lovers’ and the ‘relaxationists’. The latter side now raises the stakes in support of the EBU.

The European Banking Union is the new way to restart Europe. The Sting writer Dennis Kefalakos wrote on 2 May “The Eurozone group of countries which back the growth argument, comprising today apart from Italy and France the entire southern periphery plus Ireland, will most probably find a strong ally in the Governor of ECB. Mario Draghi insists that the central bank’s monetary policy has to be freely transmitted all over the Eurozone, to reach all the small and medium enterprises of the euro area. That is why he insists, as Letta now does, that the Banking Union must be enacted the soonest possible”.

To this effect one day ahead of the summit of the 27 heads of EU governments and states, the Italian Prime Minister, Enrico Letta, delivered yesterday in the Rome Parliament an inspired speech about the EBU. It was targeted to remind to his colleagues in today’s meeting that they behave as if the EU has no burning immediate problems. He insisted that the EU should act quickly to enact its Banking Union, with one supervisory mechanism under the roof of the European Central Bank and one set of common rules, the same for all.

The Italian ultimatum

According to Letta the lack of progress in this front has undermined the credibility of the Union revealing to the rest of the world how difficult it is in the EU to pass from pompous statements to decisions and acts. He added that if the Union doesn’t accelerate in confronting its problems, it will collapse. Letta stressed that the Union must now give absolute priority to growth and job creation rather than following blindly the austerity policies for fiscal consolidation. At this point it has to be mentioned that Italy is doing a lot to reduce its fiscal deficits. The country’s constitution obliges the government to zero those gaps by the year 2015, a target that is rightly served up to now. Then Letta concluded that if the Union continues on the same path, the ‘five star’ political formations will gain in power.

At a time when France is occupied with its internal problems, Italy has become the key player in the ‘game’ between Germany and the South. The country has a very strong backbone of small and medium enterprises and a competent agricultural sector that turn out a variety of products and services as Germany and France taken together. Annual exports reach usually €400 billion, supporting millions of jobs that Germany puts now at stake.

Given that, Rome has a lot to lose, if the Teutonic recipe for fiscal consolidation is applied to the end, and destroys this well-developed Italian productive machine. Greece, Spain and Portugal are not in the same footing. They have no chances  to survive, if they quit Eurozone. Italy has, and can swiftly return to the old tool, to strengthen its competitiveness; the lira devaluation. Exactly as Japan does (more debt, more growth). In conclusion, Italy means what it says about the possibility of a European collapse, which is tantamount to a direct enunciation over a possible return to old national currencies.

This is the only argument that Germany may take seriously. Letta must have meant every word he said yesterday, wanting to give some food for thought to today’s EU summit. This Italian politician, heading a very difficult left-right government has no manoeuvring space and as a result he is not bargaining. He issued his warning in the form of ultimatum, and this is the way it has to be read in Berlin.

The European Parliament

The European legislators have taken the message and they now quickly promote the enactment of the Banking Union. To this effect the European Parliamentarians yesterday welcomed the package of rules setting up a single EU bank supervisor, the ECB. Despite the fact that they acknowledged that the system may not be perfect, many MEPs stressed that it was a step towards truly addressing the causes of the crisis.

By the same token the European Parliament also this week promoted the directive for banks resolution and recovery, in the environment of the future Banking Union. The legislators decided that taxpayers and savers must be the last people called upon to bail out banks. This was the Parliament’s negotiating position, approved by the Economic and Monetary Affairs Committee on Monday, on draft rules on saving struggling banks. The text rules out using deposits below €100,000 and says that even deposits above €100,000 should be the last to be called in. The committee voted against using deposit guarantee funds for resolution actions and also set out strict conditions for using taxpayer’s money.

In view of all that Germany tries to delay this EBU project. The German Finance Minister, Wolfgang Schaeuble, one day says that the Banking Union presupposes a new European Treaty, and the next he retreats and appears happy with minor changes in the existing Treaties. It will go like that until the German elections in September. The reason is that the average German voter will take the EBU as a step towards mutualisation of all Eurozone debts.

After the elections, however, the whole Union will rise up and force Berlin to agree. Even Jörg Asmussen, the German economist and politician, member of the executive board of the European Central Bank said yesterday that the European Banking Union can be accomplished by mid-2014. The enemy is inside Berlin…