The strong version of the EU banking union gains momentum

The creation of a real European Banking Union, built to serve all Eurozone member states on equal terms found yesterday a new strong supporter. Yves Mersch, a member of the Executive Board of the European Central Bank and former Governor of the Central Bank of Luxembourg speaking yesterday at the UniCredit Business Dialogue in Hamburg, supported clearly the creation of a strong and central bank resolution authority adequately financed by the European Stability Mechanism. In this way he joined the ranks of those who want a seamless financial market all over Eurozone serving all national markets on similar conditions. Before elaborating on what Mersch said in Hamburg, readers should be informed that the EU is about to enact a Banking Union, first in Eurozone and then opening it to the other Union members states who want to join. This new institution will make sure that the presently fragmented and even locking out some countries EU financial market is there for everybody. Presently almost half of Eurozone’s member states are practically not served from the EU financial markets and Greek, Italian, Spanish, Portuguese and Irish SMEs, households and other borrowers in those countries have no access at all to credit. In the rare case that they find an opportunity to borrow, they are obliged to pay the triple interest rate cost for the same business risks than their counterparts in Germany and France. Which banking union? As things stand now Germany strongly opposes a full-scale European Banking Union, with a central bank resolution authority and support from the ESM. The reason is that this may at some point in the future create cost to German taxpayers. Bank resolutions may prove a costly affair and Berlin fears that a strong EBU may spread individual country risks to all member states and in this way mutualise obligations. Some weeks ago Germany managed to get the French support on that. The European Sting writer Elias Lacon reported on 31 May that, “The French President Francois Hollande and the German Chancellor Angela Merkel agreed yesterday in Paris to undermine the effectiveness of the European Banking Union. Instead of a strong central and financially independent bank resolution authority in the context of the EBU, they said they support a loose cooperation in bank resolutions… without central financial support from the European Stability Mechanism”. After that however, the leadership of the European Central Bank with its President Mario Draghi and vice President Vítor Constâncio, along with the Brussels Commission strengthened their opposing stance, in favour of a strong central bank resolution authority with support from the ESM. The European Parliament seems also to back this common ECB-EU Commission position. In this war there are now two well-formed camps around this issue. Reportedly however Paris is not wholeheartedly backing any more the German position. The Luxembourg connection Now Mersch comes along and expresses full support for the common ECB-Commission position, for a full-scale EBU with a central resolution authority and ESM backing. He is very careful though about the use of taxpayers’ money in resolving failing banks and yesterday he observed, “On the other hand, the use of taxpayers’ money should be limited to exceptional cases…Public funds such as those of the European Stability Mechanism (ESM) should only be used temporarily in emergencies. Such temporary assistance should be covered by subsequent levies on banks, so that it ultimately has no fiscal policy impact”. The Luxembourg banker however knowingly puts his weight on the strong version of the EBU while he said “The detailed design of the “single resolution mechanism” is still the subject of debate in Brussels and the Member States’ capital cities. Without prejudice to any decisions thereon, I would like to highlight …that a European resolution authority would ensure that decisions are taken in a timely and objective manner. A network of national authorities would fall short of what is necessary in this respect…A European resolution authority would be able to avoid unnecessary delays and overcome coordination-related constraints”. It’s like Mersch is saying that he knows what is going on in Berlin, Paris and Brussels over this affair. Exactly because of that however he says that he doesn’t want to miss the opportunity to put on the balance his own weight, in favour of a strong EBU. Luxembourg may be a small country but its role in EU affairs is much bigger that its size. Jean-Claude Juncker, its Prime Minister for the last 18 years has acted in many respects as a catalyst in crucial moments for the Union. Now his compatriot Mersh in taking a clearly anti-German position on the EBU is basically saying that “Juncker is with me”. The banker couldn’t be alone in this.