Eurozone’s bank resolution mechanism takes a blow

EU Finance Ministers and Central Bank Governors focussed their attention on the Banking Union, financing SMEs and the EU economic outlook on the first day of the Informal ECOFIN meeting in Vilnius. (Lithuanian Council Presidency , photographic library 14/9/2013)

It is very interesting to note how the various sides reported on the workings of the first meetings of ECOFIN and Eurogroup councils after the summer break. Seemingly the 28 ministers of Finance and the 17 of them making up respectively the two bodies discussed all the burning economic and financial issues, from the disbursement of the next financial aid trance to Cyprus to the weak economic growth and the woes of the SMEs. However the thorny issue must have been the banking union and the Single Resolution Mechanism for Eurozone’s failing banks. However reporting on all that from Vilnius was very selective and varied largely. Let’s see how the different Press releases issued by the various EU bodies covered the whole affair.

The Lithuanian Presidency informed us that “During the working lunch, the EU Finance Ministers discussed the Single Resolution Mechanism (SRM) for the first time at the ECOFIN level”. As reported by the Commission services Ollie Rehn in the Press conference after the two councils was rightly but almost exclusively worried about how the south Eurozone SMEs can finance their investment plans on equal terms as their peers in the north. Last but not least the Press release issued by the Eurogroup services covered extensively the Cyprus issue and Jeroen Dijsselbloem was depicted to make a very vague reference to the Banking Union. Actually only one sentence is devoted to the SRM in all those Press releases.

Michel Barnier

Nobody made any reference to what Michel Barnier had to say in Vilnius about the SRM for Eurozone banks. However only two days ago the good Commissioner speaking in Frankfurt at the opening of the academic year of the Centre for Financial Studies of Goethe University promised that he will bring this burning issue at the Vilnius gathering of ECOFIN.

On that occasion Barnier told his German audience that “if we want to have a fully fledged banking union, we also need a ‘Single Resolution Mechanism’…The Commission made an ambitious proposal in July. I know that Germany, in particular, has some concerns, as regards the role of the Commission and as regards the legal basis. We are confident that our proposal is legally solid. I will repeat this later this week in Vilnius when I meet the EU Ministers of Finance and Governors of the Central Banks”.

Is it possible that Barnier broke his promise? Certainly not. Presumably the single resolution mechanism for Eurozone banks was the main issue in both the informal ECOFIN and the Eurogroup councils in Vilnius. As Barnier said thought Germany “has concerns” about this issue. Especially now with the legislative elections in this country being held in one week and the public opinion having had enough about Eurozone’s financial needs. This may explain the radio silence about the SRM.

The Greek tragedy was all the Germans could take before going to the polling stations. Another electoral debate about additional financial obligations for Germany stemming from the enactment of the SRM could greatly help the Eurosceptic political formations only days before the vote. That’s probably why nobody in the Vilnius gathering wanted to advertise that the central issue was the ESM.

At this point it must be noted that the European Commission and Michel Barnier personally are pressing ahead with a proposal to enact a central bank resolution authority in Brussels under the EU’s executive arm, thus securing the functioning of the SRM. Of course this central authority under Commission’s roof would centralise also the financial obligations which will certainly stem from an eventual resolution of a failing major Eurozone bank. To this efect Barnier also recognises that the resolution authority while resolving banks would need access to funding. This funding however would diffuse the banking risks all over Eurozone by mutualising the liabilities to be left behind the resolution of a major bank.

It’s the same old story

Obviously the largest part of those liabilities will burden the German taxpayers. To mitigate that Barnier proposes to impose a special levy on all Eurozone banks to fund a resolution cushion, thus avoiding to burden taxpayers. This levy though is a very vague option because its legal base is rather unsound. Already the Commission’s proper lawyers said this week that the imposition of a special financial tax (The European financial transaction tax – FTT) in twelve willing to do so EU countries (Tobin Tax) is illegal.

All in all this last turn undermines directly the Commission’s proposal for a central Single Resolution Mechanism to deal with failing Eurozone banks from Brussels. That’s why only the Lithuanian Presidency made a vague reference to the SRM while everybody else including the Commission and Eurogroup’s Presidency had nothing to reveal on the matter. Unfortunately it’s not only the German election of 22 September that stopped the reporting on the SRM. Berlin will certainly continue strongly opposing the central option for this Mechanism even after the election.