Has Germany rebuffed ECB on the banking union?

The leadership of the European Central Bank took yesterday a step back from its strong presence in the public discussion over the depth and the strength of the under construction European Banking Union (EBU) and more precisely the single bank resolution authority. Both its President and Vice President Mario Draghi and Vítor Constâncio had very actively supported a strong EBU with a central bank resolution authority, backed financially by the European Stability Mechanism (ESM). In this way they both appeared as strong advocates of spreading, up to a limit, all Eurozone bank risks to all member states. ECB’s Vice President had quite openly asked for that in a speech a few days ago. Given that the risks, hidden in the balance sheets of the major national banks in almost all member states are closely connected to sovereign borrowers, Germany opposed this option. Berlin denied sharing indirectly the south European sovereign financial risks, through a quasi guarantee of the banks which are involved in this affair. The response of the German government was direct and the Federal minister of Finance Wolfgang Schäuble stated bluntly that such a prospect would require an amendment of the European Union treaties. The idea is that the mutualisation of the individual country financial risks through the EBU is a major change of the ‘acquis communautaire’, not provided by the EU Treaties. Draghi and Constâncio In view of that Mario Draghi in yesterday’s traditional press conference, after the monetary policy monthly meeting of ECB’s Governing Council, appeared rather distant from this issue. At this point it has to be mentioned that the Council left the central bank’s main interest rate unchanged at 0.5%, as it was formed last month. However, Draghi and Constâncio have argued on many occasions during the past few weeks that the need for unobstructed transmission of ECB’s current monetary policy of cheap money to all member states can only be served by a strong EBU and a central bank resolution authority able to count on ESM resources. In this way ECB’s leadership is aiming at reducing Eurozone’s financial market fragmentation to the lowest possible level. The ultimate goal is that the SMEs, in the peripheral and recession stricken countries of the south, will be able to borrow on the same terms and interest rates as their German competitors for the same business risks. Only in this way the south could start reducing the skyrocketing unemployment and hope to enter in a sustainable growth path. Yesterday though Mario Draghi, in the presence of Constâncio, during his introductory statement didn’t mention the SMEs of the south not even once. While talking about the transmission of ECB’s monetary policy, he was very careful and said, “In order to ensure adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential that the fragmentation of euro area credit markets continues to decline further and that the resilience of banks is strengthened where needed…In particular, the Governing Council emphasises that the future Single Supervisory Mechanism and a Single Resolution Mechanism are crucial elements for moving towards re-integrating the banking system and therefore require swift implementation”. Which banking union? There are three obvious comments to be made after this statement. Firstly, Draghi appears now to believe that there is a defragmentation process going on and possibly there is no need to further enhance it. Secondly, not all peripheral banks need strengthening, only “where needed”. Thirdly, he doesn’t seem any more to have a strong opinion of its own on EBU and he turns to the Governing Council for that. Obviously Draghi was the target of some strong complains from Berlin and elsewhere during the last few days. Draghi also appeared restricted on the burning issue of the single bank resolution mechanism. Asked about it by a journalist he said, “A different thing would be the existence of a single resolution authority, where the divergences (of views) are related to whether or not treaty change was required. But certainly, the establishment of a single resolution mechanism would already constitute significant progress and would help the single supervisor take over with great confidence”. An obvious intervention In this passage Draghi is very cautious to note that there are other views around this question, that is if an EU Treaty change is needed in order a single resolution authority to be created. He bypasses this issue by saying that he is happy with the creation of a single resolution mechanism to help the single supervisor which is the ECB. It is tempting to observe on this statement that somebody told Draghi that he only has to worry about the single supervisor and leave the decisions on bank resolutions to politicians. There is no doubt that the leadership of the ECB has fought a noble fight to defragment Eurozone’s financial markets and help the SMEs of peripheral countries to regain access to adequate and cheap finance. It’s the competency of politicians however to decide that. Now the only hope for the creation of an effective EBU is the European Commission. The EU’s executive arm has reportedly taken the initiative to undertake itself the role of the central bank resolution authority, and make sure that a seamless financial market is again under construction all over the 17 member states, as it was the case until 2009. Fortunately the Commission cannot be rebuffed on that by Germany.