The last decade has seen little progress in EU integration. The financial crisis that erupted in 2008 was an excellent opportunity for EU leaders to push forward the integration of financial and capital markets built on common regulation, supervision and risk sharing. Today, we are nowhere near achieving single economic, financial and capital markets.
Germany remains obsessed with fiscal rectitude. The German ruling Christian Democratic Party recently communicated its commitment to conservative fiscal principles when it tweeted: “We have a small fetish: solid finances with new debts”.
Italian politicians were not amused when German Finance Minister Olaf Scholz proposed a common deposit insurance scheme subject to all member states respecting strict fiscal conditions.
One of these conditions is that sovereign debt held in banks’ balance sheets should no longer be treated as being risk-free. Italian banks are the most exposed to their government’s sovereign debt which is the second-highest in the EU. Risk-weighting sovereign debt would almost certainly provoke a solvency crisis for some Italian banks.
The EU leaders lost a unique opportunity to forge more integration in the Union in the last decade. Two critical areas are the banking union that remains half-baked and the European Stability Mechanism, the eurozone’s defence against a deepening debt crisis. It will probably take another financial crisis to convince EU leaders to put aside their national interests to promote more Union integration.
The banking union has certainly generally brought about better supervision of systemically important banks in the eurozone. The Single Supervisory Mechanism is based on a single rule book that, in theory, should ensure uniformity in the application of banking regulation. But there are still some critical weaknesses in the implementation of banking regulation.
The EU leaders lost a unique opportunity to forge more integration in the Union in the last decade
The recent collapse of the Banca Popolare di Bari in Italy has demonstrated how the ‘doom-loop’ – the link between banks and the governments in the countries where they operate – is still not broken. The bail-in principle that is meant to save taxpayers’ money when failing banks need to be rescued is still applied inconsistently throughout the eurozone. The Italian government had to step in with guarantees to help Banca Popolare di Bari to continue existing.
The Single Resolution Mechanism is the second pillar that should underpin the single banking market. This mechanism is meant to ensure an orderly resolution of banks that face difficulties. However, its complex governance with a fragmented decision-making and execution process does not augur well for the consolidation of a single banking union.
The common deposit insurance scheme to cover all eurozone banks is still just a concept with little chance of coming into existence as the sharing of risk is generally shunned by northern EU member states like Germany, Holland and Finland.
What has saved the EU from another systemic financial crisis are the unorthodox monetary policies of the European Central Bank. The ECB commitment to buy the sovereign debt of countries facing critical fiscal difficulties and to maintain interest rates at historically low levels is unsustainable in the long term. This unconventional monetary policy distorts the pricing of risk in financial and capital markets.
The European Stability Mechanism is one of the elements that EU leaders created in 2012 to defend the eurozone from a deepening debt crisis. It is the war chest that should, in theory, help the Union to recover from another substantial financial crisis like the one of 2008-2010. This agency provides indirect assistance to member states facing difficulties. It absorbs losses if countries receiving help fail to repay it.
Some analysts argue that the capital of the ESM is unlikely to be sufficient to deal with a systemic crisis in the eurozone. The original intention for the ESM to invest in the recapitalisation of banks facing solvency problems has been abandoned and now such rescues are still being managed by governments in which such banks operate.
The EU’s system of governance remains complex. The European Parliament and Council still generally put national interests ahead of integration interests in critical issues like fiscal and financial management. National political priorities rarely merge in a Union so disparate in the economic performance of the different member states. This attitude is no way to promote integration.
The Brexit hangover may soon be over for EU leaders. But the stagnation in the Union will persist as the inability or unwillingness of EU leaders to take tough decisions to achieve genuine economic, fiscal, financial and social union put European citizens’ long-term prosperity at risk.