Europe’s efforts to form a united front behind eurozone banks are reaching a climax, but many fear they will fail to restore confidence and prove flimsy should another crisis strike.
After more than a year of talks, ministers from across the EU early on Thursday agreed to close failing banks, but the process will be complex and politicized. They also stopped short of an ambitious plan for eurozone countries to help each other in tackling problem lenders.
An agency and fund to wind down bad banks, working in tandem with the European Central Bank as the new watchdog, is an important step towards banking union, but the loose ends could lead to the complete unraveling of the project.
Although hailed as a “historic” moment by French Minister of Finance Pierre Moscovici, many who emerged from the meeting into the Brussels rain were disappointed by the result.
“It’s really a farce,” said one senior official involved, who asked not to be named. “We’re patting [each] other on the shoulder and congratulating each other, but really what has been achieved is a far cry from what was needed.”
After the agreement among countries, talks now begin with the European Parliament to finalize the law.
With no immediate banking crisis in sight, the new structure is likely to go untested for now, but it could buckle if one were to happen.
Furthermore, promises to pool eurozone resources to deal with bad banks are so distant — only after 10 years if at all — that they will do little to shore up confidence.
In the meantime, banks will pay into a fund that will grow to 55 billion euros (US$75 billion), but only by around 2026, and that amount would have been entirely eaten up by the Irish banking bailout alone. New rules would, however, push more of the burden onto bank creditors.
Some officials fear missing elements in the scheme could restrain the European Central Bank from revealing the true extent of banks’ problems in health checks next year if this would overburden weak countries with a costly bill for their repair.
For Alan Ahearne, an economist who advised the Irish government when it was sunk by its banking collapse in 2010, the deal does not amount to much.
“The sovereign is still the backstop for its own banking system,” he said. “That’s not a proper banking union. That means that funding costs for banks in peripheral countries remain high and sovereign borrowing costs will remain high.”
What has been achieved in Europe is a pale shadow of the US, where the federal government can transfer funds to help weaker states. Strong countries in the eurozone such as Germany do not send aid to weaker states such as Portugal or Greece. Instead, they lend them money.
“The state of Pennsylvania does not have to issue bank guarantees. That’s done by federal agencies,” Ahearne said. “That’s true banking union.”
Compounding this problem, the procedure that will be used to shut a bank in the eurozone will be heavily politicized, involving as many as all 18 countries in the currency bloc, each fighting to protect its own interests.
This process, described as “laughable” by one economist, will also involve officials from the European Commission as well as a new agency tasked with closing banks. Although ministers agreed a fast-track procedure, even lawyers in the room were perplexed by how it should work.