September 23, 2020

News Analysis: Germany a Hurdle to European Unity on Banks

BRUSSELS — European Union officials presented long-awaited plans on Wednesday in hopes of ending the vicious circle in which bailouts of failing banks endanger government finances and the euro currency.

But first they must face down Germany.

Even as officials here laid out their blueprint, the uncompromising stance of German officials like Wolfgang Schäuble was ringing in their ears.

A day earlier, Mr. Schäuble, the German finance minister, warned the European Commission “to be very careful” with its proposal for a single authority to oversee the wind-down of troubled banks because “otherwise, we will risk major turbulence.”

It was in keeping with Germany’s longstanding resistance to sharing financial risk with other European countries. But it was at odds with the more unified approach to European problem-solving that Brussels wants.

“Germany’s intellectual starting point is national resources for national problems, and that is some way off the European Commission’s proposal, which is looking for a European solution,” said Mujtaba Rahman, the director for Europe at the Eurasia Group. If the proposal fails, he said, there is the danger that “the problematic link between banks and sovereigns will actually have been reinforced, not weakened.”

The plan presented on Wednesday by Michel Barnier, the European commissioner overseeing financial services, was conceived as part of a broader European banking union whose other provisions would include a single banking supervisor and an agreement to impose any losses mainly on a bank’s creditors and shareholders, rather than taxpayers.

The program, called the single resolution mechanism by Mr. Barnier, would rely on the European Central Bank to signal when a financial institution in the euro area was facing severe difficulties.

A resolution board, supported by a staff of around 300, and made up of representatives from the central bank, the European Commission and member states of the union, would then make a recommendation, as necessary, on how to shut down or shrink a bank. The board also could draw on a shared fund to help close or radically restructure failing lenders after creditors and shareholders have borne some losses.

European Union officials want the size of the fund to be about 70 billion euros, or $90 billion, by the time it is fully financed by 2025, with money coming from levies on banks.

There would be limits to the power of the new centralized system. It could not, for example, order the closing of a bank without permission of the host government if doing so would result in that country’s taxpayers being liable for some of the bill.

The process was aimed at “involving all relevant national players,” Mr. Barnier said at a news conference Wednesday. But, he said, central management is vital to “allow bank crisis to be managed more effectively in the banking union.”

Giving such a central role to the European Commission, the European Union’s executive arm, could irk both Germany and France, according to some analysts.

That “clearly contradicts” a proposal signed jointly by France and Germany ahead of the last summit meeting of European leaders in June, Philippe Gudin, an economist at Barclays, wrote in a research note. Discussions, scheduled to begin in September among finance ministers, “will likely be long and lively” with the risk of delays because of a lack of agreement, he wrote.

Mr. Barnier said he wanted the system up and running by January 2015. That would require agreement over the course of next year.

For now, Germany is the country raising red flags.

The central sticking point is the call by German officials like Mr. Schäuble for a change in the European Union’s treaties before acceding to anything more than a network of national authorities to handle bank failures.

Treaty changes would be cumbersome and time-consuming process that could take years, if they succeeded at all.

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