A day that Berlin and Brussels would remember for a long time

European Parliament. European Central Bank President, Mario Draghi (first from right) participated in the fourth Monetary Dialogue of the Committee on Economic and Monetary Affairs this year. He presented the ECB’s perspective on economic and monetary developments. The Committee will also vote today on the report regarding the establishment of a Single Resolution Mechanism and Single Bank Resolution Fund. (EP Audiovisual Services, 16/12/2013).

It was not by accident that the President of the European Central Bank Mario Draghi chose the right time to ring the danger bell against a “bad Banking Union”, while speaking yesterday in the Monetary Affairs Committee of the European Parliament. Obviously, he wanted to be heard by the new German government which is expected to be sworn in today in Berlin and also by the Eurogroup of the 17 euro area ministers of Finance, who are expected to agree this afternoon in Brussels on a complex and ‘nationalised’ system for winding down troubled banks.

This bank resolution mechanism is considered as the second pillar of the Banking Union. Obviously Draghi fears that the Union may be badly limping, because Germany has kicked it on the foot. It was the German minister of Finance Wolfgang Schauble who has insisted so far that the second pillar of the Banking Union should be lymphatic, with bank resolutions remaining a national affair, without a central, uniform and a liability mutualising character. Schauble is the only member of the German government who retains his position in the new scheme. Let’s turn now to the news.

A semi-functional resolution mechanism

That the new German government is to assume its duties this morning was announced some days ago. What Draghi said however yesterday, during a hearing at the European Parliamen, is breaking news. Speaking to the MEPs he said, “The EU member states’ (the EU Council) current plans for a common system for winding down troubled banks risk being too complex to work”. According to a Press release issued by the Parliament, legislators’ opinion on these plans, for which the Monetary Affairs Committee is to approve a negotiating mandate today, “is likely to be much closer to Mr Draghi’s vision than that of member states”.

“The credibility of banking union depends not only on a single supervisory system, but also on a single resolution mechanism”, said Mr Draghi, in his opening remarks at his regular quarterly meeting with committee MEPs. “The resolution mechanism cannot be single only in name. It is not possible to have hundreds of people consulting each other about the viability of a bank”, he added. Obviously Draghi wouldn’t have stressed all that, if he didn’t fear that the Eurogroup today, pressed by Germany, is ready to agree on a limping Single Resolution Mechanism to deal with failing euro area banks.

What Germany wants?

For days now the European Sting reports that Germany insists and the President of Eurogroup and Dutch minister of Finance, Jeroen DijsselbIoem agrees to a semi-operational SRM. The German idea is that if the resolution of failing banks is not centrally operated, under a standardized procedure, and instead is decentralized and functions randomly and ad hoc under the 17 governments, then every country will have it its own way and let Germany alone to protect its own banks.

The European Central Bank, under Mario Draghi, is adamant that the SRM must be centrally operated and uses a uniform procedure in resolving failing banks. Until now the Commission was of the same view and actually had proposed to the Council that the SRM need to be enacted under its own roof and authority in Brussels. Now, however, that the responsible Vice President of the Commission, Ollie Rehn, is candidate for the position of the President of the Commission, and of course needs the German backing, it seems that the EU’s executive arm would turn to the direction the Berlin wind blows.

Unfortunately this wind threatens to bring down the European Banking Union, the most important European project after the introduction of the common currency. Of course, a solid Banking Union would command a higher level of comradeship between member states. The eventual resolution of a medium-sized bank can break the economy of a member state. Ireland, Spain, Greece and Cyprus have experienced that.

Contrary to what is commonly accepted, those countries paid with their own money the resolution or the recovery of their banks, despite the fact that all those lenders were privately controlled. The ‘help’ they received from the rest of the Eurozone member states had the form of sovereign loans, which will be repaid to the full, plus interest. What is not commonly known also has to do with the eventuality that those countries could have left the banks to rot as Iceland did, and pay attention only to the social side effects of the bankruptcies. The overall cost to taxpayers would have been much lower.

Why the poor paid the price?

However Athens, Dublin, Madrid and Nicosia by accepting to save those private banks and burden their citizens with huge debts, at the same time they saved also the creditors and investors in those banks, which were German, French and Dutch lenders, insurance companies, pension funds, investment firms etc. In short the crisis hit member states could have avoided the worst, as Iceland did, by letting their own and the major Eurozone banks, insurance companies and investors to go bust. In such a case it would have been Berlin, Paris and The Hague paying the euro rescue bill and not the poor Irish, Greeks, Spaniards and Cypriots. In short the distribution of the cost of the current financial crisis in the Eurozone had been politically managed and obviously the powerful exploited the weaker. No markets neither fair competition works in those affairs.

Turning now to the new German government, in order for one to understand why Germany is what it is, one has to follow the right-wing criticism vis-a-vis the new grand coalition government of Christian Democrats and the Socialists (CDU and SPD). The German conservative commentators are lamenting the imposition of a minimum wage of €8.5 an hour and the prospect of an annual increase of €20 billion in government spending. For reasons of comparison it must be mentioned that the German Gross National Income (GNI) is of the order of €2.7 trillion and the government sector spends 44.7% of it. The €20 billion is an increase of 0.014% in public spending and 0.0074% of GDP.

All in all Berlin will continue rejecting for as long as possible a more relaxed fiscal policy for Germany and the Eurozone, while it will continue to oppose to a closer Union, if this may mean gains for others.