The Banking Union divides deeply the European Union

ECOFIN Council, Luxembourg, 21/6/2013. (From left to right), Jeroen Dijsselbloem President of the Eurogroup, Anders Borg, Swedish Minister for Finance, Pierre Moscovici, French Minister of Finance. (Council of the European Union photographic library).

As the European Sting predicted the ‘Friday battle at Ecofin’ Council was not about the specific country recommendations of the Commission, or about the seven-year extension of the loans to Portugal and Ireland, nor on the direct bank recapitalisation instrument. It was the very issue of the creation of the Banking Union and its core tool the bank resolution authority or rather authorities that divide the Europeans. The too short reference on this subject by Ollie Rehn after the meeting in Luxembourg yesterday tells the tale best: “We took one big step towards a banking union yesterday, and I expect another one tonight”, he said.

Just one step

Rehn’s “one step towards the banking union yesterday” in the Eurogroup was amply analysed by the Sting writer Elias Lacon in his article “IMF v Germany: Eurogroup keeps the fight under control”, published at mid-day of 21 June. This is about the direct recapitalisation of banks by the European Stability Mechanism, the main features of which were decided by the Eurogroup on Thursday evening.

They are so complicated and stiff to the point that it is questionable if they can be put into action any time in the distant future. As for the retroactivity of the direct recapitalisation it will remain a Greek dream for years. In any case the Ecofin Council set a €60 billion limit out of ESM’s money that can be used to this purpose, a quick backstop which renders the whole affair almost meaningless. The retro-activation only in the case of Greece can absorb €48.5nb.

Which banking union?

Finally the heavy fire against the banking union and more precisely against the institutionalisation of a strong and central bank resolution authority as the Commission wants it, came from a rather unexpected source, Sweden. Anders Borg, the minister of Finance of this country while coming to the gathering said that the Eurozone countries are preparing a dangerous scheme for everybody else. He meant what European Sting writer George Pepper described in his 20 June article under the title “Ecofin: ‘The Friday battle’ for the banking union”. It went like that, “Consequently the end result may be that the future bank resolution authority could end up recovering entire countries not only banks. The cases of the Irish banking crisis in 2010 and of Spain in 2011 are perfect examples of that”.

This is exactly what the careful Swede meant by referring to a dangerous game played by the Eurozone countries. Not to forget that the non Eurozone members of the EU can join the banking union. Of course a Brussels answer to Stockholm may be ‘you can very well stay out’. Sweden however had its own problems with banks more than ten years ago and it took many years of austerity and hard work to overcome it. Consequently Sweden is very careful with those things and probably wouldn’t like to stay out of an EU Banking Union to its liking.

In this respect the Commission could have also observed to the Swedish minister, that the whole idea of the banking union is to cut once and for all the unholy bonds between major bank balance sheets with the corresponding sovereigns in all member states. Presumably this will be one of the main targets of ECB’s supervision over all lenders. Still however those connections are so huge and many that it might take years to eliminate them and Eurozone wants the banking union to be operational in 2015.

In any case the Swedish minister of Finance insisted that the task of bank resolution and recovery should be left almost entirely to national authorities and obviously he disagrees also with the use of ESM money in this affair. No wonder if the German minister of Finance, Wolfgang Schauble, was on the same side with the Swede.

Truly the Ecofin Council of Friday must have been a real battlefield. The ‘centrists’ camp may have been formed by the European Commission and almost all Eurozone countries, while the decentralised option for the bank resolution authority(ies) may have been led by Germany, supported probably by France and some other countries, Sweden of course included.