There will also be potentially dangerous consequences for the ECB itself. The use of the Lisbon Treaty clause means that the ECB must be given these additional responsibilities. However, it is impossible to create a separate bank supervision entity within the ECB, as has been done in France, for example, with the Prudential Control Authority, or in the UK with the new Prudential Regulatory Authority, which has its own board and accountability arrangements within the Bank of England.
The importance of these structures is that they insulate the central bank’s monetary policy independence from corruption by the tighter accountability requirements that inevitably come with banking supervision. Because supervisors’ decisions affect individuals’ property rights — and their actions or omissions can put taxpayers on the hook to bail out banks — governments, parliaments, and the courts are bound to hold the watchdogs on a tight leash.
That is why Germany’s Bundesbank, which always guarded its monetary policy independence so assiduously, has once again found itself in the rejectionist camp, expressing severe doubts about the route that the commission plans to take. This time, it is right.
There are other serious issues, too. According to the commission’s model, the European Banking Authority will remain in place and is charged with producing a single rulebook for all 27 EU member states. However, while its work is carried out under the normal qualified majority voting system, the 17 eurozone countries will have a single supervisor, so will have a bloc vote. The commission is trying to find ways to protect the rights of the non-eurozone countries, but the very complexity of what is proposed shows just how inadequate the scheme is.
Non-Europeans, in particular, may find the entire topic impenetrably abstruse. However, it illustrates a simple point: Europe is trying to achieve a stronger federal model that responds to the weaknesses revealed by the eurozone crisis. Yet it is doing so without addressing the crucial need to bring its citizens along. The devices that the EU is adopting are designed specifically to avoid having to consult them.
The proposed construction of a banking union reveals this fundamental flaw at the heart of the European project today. It is difficult to be optimistic about the success of an initiative built on such flimsy legal foundations and lacking democratic legitimacy. Europe’s banks and their customers deserve better.
Howard Davies, former chairman of Britain’s Financial Services Authority, deputy governor of the Bank of England and director of the London School of Economics, is a professor at Sciences Po in Paris.
Copyright: Project Syndicate