European Banking Union: Like the issue of a Eurobond?

ECON committee meeting, European Parliament – Public hearing with Mario Draghi, chairman of the European Systemic Risk Board and President of the European Central Bank (on the left) being welcomed here by Sharon Bowles, chair of Economic and monetary affairs committee. (EU Parliament photographic library, 8/7/2013).

If what the President of the European Central Bank, Mario Draghi, said yesterday to EU’s legislators is read together with the inspired speech the European Commissioner Michel Barnier, delivered in Rome’s Palazzo Farnese (the French embassy in Italy), then the conclusion is that the European Union cannot be a source of problems as the extremists of the right and the left preach, but a well-managed political construction which leads slowly but surely its 28 Peoples to a higher cycle of unity and prosperity. In those days of austerity and high unemployment this may sound like wishful thinking, but it’s not. Let’s see why.

Cheap money from the ECB

Yesterday Mario Draghi discussed the latest developments in the Eurozone with legislators in a public hearing of the Economic and monetary affairs committee of the European Parliament. He explained the huge repercussions of the latest decision of ECB’s Governing Council to guarantee a long-term low-interest rates period for Eurozone. He said that  the ECB’s low long-term interest rate announcement last week  can serve as “ways to boost lending to small firms and efforts to reduce the fragmentation of financial markets in the EU”. In short Draghi told the MEPs that this new policy is targeted to serve the SMEs in the peripheral countries, which now are almost totally cut off from adequate and cheap financing.

European Sting writer Suzan A. Kane wrote on 5 July “In short Eurozone’s central bank decided yesterday a major change in its monetary policy. With inflation dangers well anchored below 2%, the ECB practically promised to support economic growth with cheap money and ample liquidity for all Eurozone banks and countries for the years to come. It stopped short of buying government bonds, which is forbidden for ECB”.

Of course, financial market conditions do not change overnight. But if ECB’s liquidity starts flowing to peripheral banks it is logical to expect that a part of it will be directed to the SMEs. Naturally the credibility of the peripheral banks has to be restored and the rates of their non-performing loans to be contained, if the present fragmentation of EU’s financial market is to be drastically reduced and interest rate differences to be minimized.

In view of that the MEPs welcomed the desire to ease lending to small and medium-sized enterprises (SMEs), evident in last week’s low rate decision of ECB’s Governing Council. But they again argued that banks do not lend to SMEs enough, despite getting cheap funding from the ECB. They suggested that risk ratings for SMEs should be changed, to enable them to get loans and play their role in the economy.

Barnier’s Banking Union

At that point enters Michel Barnier from Rome. His speech was entitled “L’Union bancaire, et après ? Réinventer l’Union européenne” (The Banking Union, and then? Reinventing the European Union). In short Barnier said that the political decision to create the European Banking Union will transform the EU as we know it. He thinks that the EBU will trigger very far-reaching effects as the very introduction of the single currency did. In such an environment there will be no country risk but all SMEs will be financed on equal terms for similar business risks.

He stressed that the creation of the EBU also proves that the EU appears politically strong and active and can correct the faults of its past. At that point it has to be reminded that the absence of a common bank resolution procedure drove the Eurozone to its present problems, because the shortcomings of the banks were transmitted directly to member states, or vice versa in the case of Greece.

According to Barnier, the EBU constitutes the starting point for the creation of the economic chapter of the monetary union. Surely this economic chapter must contain a lot of solidarity between member states. The reason is that the banking union carries a built-in common guarantee. Why? Because while resolving failing banks, despite the fact that the interested parties (shareholders and creditors) will know ex ante the exact procedures to be followed and what are the risks, the full guarantee for deposits of up to €100,000 creates a common obligation, like the issue of a Eurobond! In short the EBU has an element of mutualisation of risks of the entire Eurozone banking sector.

That is why the European Central Bank will supervise all and every bank in order to make sure there won’t be more unpleasant surprises in the future. In short the Banking Union and the ample and cheap finance from ECB may drag the Eurozone and the EU out of its present recession and place it in a solid growth path that can effectively reduce unemployment. The problem is that there is not much time to accomplish all those institutional changes. The political and social dead ends in many member states cannot wait. Probably ECB’s decision for ample and cheap finance for all now may constitute an interim answer to this problem.