Banking union will not end Europe’s crisis

 
By Wolfgang Münchau
 

Eurozone leaders held a summit last week that was important, but not for the reasons you might think. What has been decided will change the future of Europe. The banking union is a tool so powerful that it could unite the core of the EU. But it will also separate it from the rest. It is more useful to think of the banking union as a long-term political project than as a tool of crisis resolution. Depending on your view, it can be monumental or irrelevant.

The decision taken at the summit was to agree a firm timetable for the set-up and the legal foundations of a single supervisory mechanism – a new eurozone bank regulator within the European Central Bank. It will be the first of several steps towards a full banking union – a process that will take many years to complete. The SSM will ultimately encompass all 6,000 eurozone banks. It may not supervise each directly but it can seize control when it wants to. The set-up of the SSM will be followed by a common bank recapitalisation policy and fund, a single resolution mechanism and, ultimately, a single deposit insurance scheme. The economic functions of resolution, recapitalisation and deposit insurance can be pooled in different ways, in different institutions. The final shape is as yet uncertain. But it is going to happen.
 
 
Angela Merkel, German chancellor, was right when she said you could not have the SSM up and running by January 2013. A complete banking union is hugely complex and takes time. Important aspects of the project will require a change in the European treaties. Britain and others with no ambitions to join the eurozone will not sign up. It would be wrong to think of banking union as an extension of the single market. It is best to think of it as part of the hard-wiring of a monetary union.

The banking union destroys two illusions that accompanied the creation of the euro – one held in the eurozone itself, one outside. The first was that a minimalist monetary union would be sustainable. The outsiders succumbed to the illusion of a false menu choice: the ability to pick and choose areas of European integration to take part in. It turned out that remaining inside the EU but outside the eurozone was still not a sustainable biosphere.

As time goes on, the eurozone will usurp the EU. It will have its own banking union, its own budget, its own political union and, ultimately, its own single market – something that is not legally possible now. The fundamental reason why Britain is now headed for a probable exit, or at least for marginalisation, is not a eurosceptic prime minister but the decision taken 15 years ago not to join the euro.
 
The banking union and its various cousins constitute the biggest act of political integration in Europe since the creation of the European Economic Community 55 years ago. I believe that they will be even bigger than the euro itself because they are a significant encroachment on national sovereignty on several levels.

While the combination of banking, fiscal and economic union, if done properly, would create a minimally sufficient institutional set-up for a sustainable monetary union, there is a big snag: the monetary union might blow up well before the new mechanisms kick in. The banking union, as currently constructed, will not help us in the current crisis.

Many commentators made two mistaken assumptions. The first was that the SSM would be operational from January. The second was that this would trigger an automatic change in the existing bank rescue programme for Spain. It now appears that the SSM will begin work in the second half of 2013. Eurozone leaders have reaffirmed that the operational start of the SSM would allow the European Stability Mechanism to recapitalise banks directly without burdening member states.

The misunderstanding is that this does not apply to Spain’s existing bank recapitalisation programme. The economic purpose behind direct bank recapitalisations is to end what the International Monetary Fund calls the “pernicious link between banks and sovereigns”. The new system will do that eventually, but not just yet.

The Spanish government will remain responsible not only for the debt of Spain but also for all debt in Spain. The pernicious link will persist. The banking union is a big deal. But so is the persistent threat to the future of the eurozone. It has not changed.

I am now persuaded to accept that the eurozone’s political establishment is ready to build the necessary institutions for a monetary union. That was not the case one year ago. What is still missing is the political will to resolve the actual crisis.

The ECB’s programme of Outright Monetary Transactions is important, but cannot bridge this gap. Without an acceptance of default, and thus transfers, this is ultimately not possible. My conclusion is that whatever risk one might attach to a breakdown of the eurozone has not fundamentally changed.

What a banking union will do is ensure that the monetary union becomes sustainable. But it has to survive first.

Copyright The Financial Times Limited 2012.