When is Berlin telling the truth about the EU banking union?

The German Federal Minister of Finance, Wolfgang Schäuble (FMF photographic library).

In a rare but not quite unexpected move, the German Federal Minister of Finance Wolfgang Schäuble has reportedly wrote a letter to his colleague, the Federal Minister of Economics Philipp Rösler, proposing that their two ministries cooperate in supporting the Eurozone countries under distress. To do this, he tells his government fellow, they should use the means and the abilities of the German development bank KfW. This is what ‘Der Spiegel’ magazine is understood to report today, when it appears in the morning.

Presumably Schäuble in this letter says that “if we do not act now the European south risks losing one generation”. A number of European media translated this into a relaxation of the German position for austerity in Eurozone. But it’s not like that at all.

Only a few days ago, on 22 May, the German minister of Finance met with his Portuguese counterpart, Vítor Gaspar. A careful reading of the announcement issued by the German Ministry of Finance after this meeting may reveal what exactly Schäuble means with this letter to Rösler. The relevant part of this press release reads like that, ”In this respect, the Ministers discussed possible ways by which Germany could provide support to Portugal, in particular to address financing and capitalization needs of Portuguese high potential SMEs. In the course of today’s meeting, the ministers agreed to closely cooperate in preparing technical as well as financial support together with the German development bank KfW”.

A banking union for all

However this is not news at all. Germany already proposed many months ago to Athens technical and financial KfW support for the Greek SMEs, without much success. KfW doesn’t possess the ability nor has the needed flexibility to go to Greece or Portugal and perform such a task in a volume semantic way. This is a standard offer by Berlin to countries depending on Germany like Greece and Portugal, even Spain but not in the case of Italy. Rome would have said that if KfW wants to make an opening to Italy there is nothing to stop it, but the Italian government would have added that the problem is not to accord ten or twenty or one hundred loans to some tens of Italian SMEs, out of the hundreds of thousands.

The problem is that all the Italian SMEs cannot find adequate finance for their investment projects, and when they can the cost is triple or more than the same German SMEs have to pay for exactly the same business risks. It’s the country risk which must be eliminated in order to defragment Eurozone’s financial markets and this can be accomplished only by the enactment of a real European Banking Union. Only then the SMEs all over Eurozone will have to pay the same interest rates for the same business risks.

But for this prospect Schäuble had also an answer, after meeting with Gaspar. In the same press release issued then by the German ministry of Finance one could read the following passage, “The Ministers share the view that it is urgent to make progress towards deeper economic and monetary union. One problem is fragmentation of financial markets. Firms in the periphery are facing higher funding costs than firms in the core countries with the same credit risk and business prospects. Financial fragmentation is hampering the adjustment and contributing to the weak macroeconomic performance of the euro area. Ministers agree that it is in the interest of Europe as a whole to address this issue and to establish a banking union swiftly”.

Obviously, on 22 May the German minister of Finance had no problem at all to agree that a banking union should be established swiftly. The question remains however, exactly which banking union Schäuble has in mind? If it is to be a loose one, as Germany wants it, without much sharing of obligations, then the country risk will not disappear for Greece, Italy, Spain, Portugal and other countries. Still the SMEs there will continue having borrowing problems and pay more for the same business risks than their counterparts in Germany.

ECB gives the answer

In view of this, Vítor Constâncio, Vice-President of the European Central Bank, delivered a speech in Brussels last Friday 17 May, in order to clarify which banking union will be meaningful for Eurozone and the EU in general and prove adequate to eliminate the country risk in practice. The European Sting understood what Constâncio wanted to say, and produced an analysis on European Central Bank’s proposal in relation to what will be an effective banking union.

Vítor Constâncio, Vice-President of the European Central Bank (EC Audiovisual Services).

It was exactly the passage that follows from ECB’s Vice-President’s speech, which revealed the true intentions of the central bank and it goes like this: “From the ECB’s perspective, it is essential that the Single Resolution Mechanism (for banks) comprises a Single Resolution Authority and single fund financed by ex-ante and risk-based contributions from the banking sector itself. To remove any doubts over resolution financing, the fund should be able to draw on a common backstop if needed – possibly a credit line from the European Stability Mechanism. Any credit would be repaid via additional levies on banks and thus be fiscally neutral in the medium term. This construction raises certain institutional questions which cannot be answered today, not least related to membership of the ESM. But in our view, an approach based solely on coordination between national authorities without a Single Resolution Authority and without a common backstop would clearly not be sufficient. It would make the Banking Union significantly less attractive for non-euro area Member States and hence less effective for the EU as a whole”.

In this way, the most competent authority on how should a European Banking Union has to be enacted, clarifies that in order to have a meaning it must rely on the €750 billion of the ESM. Only then the probable resolution of some banks and consequently the credibility of all the other lenders operating in the banking union will be secured by a mechanism solidly based on the existing financial powers of the ESM.

Is Berlin ready to accept that or the German taxpayers, who have financed the ESM, will revolt? In any case this question cannot be answered before the September legislative elections in that country. Hopefully Germany will not be able to resist pressures from within and without the EU, towards the creation of an effective and real European Banking Union.