Tuesday, March 11, 2014
Should the Eurozone really bank on past successes?
This week will be decisive for the final version of the Eurozone’s bank resolution fund. A compromise is still not in reach. It’s again one of these crucial weeks for the Eurozone, which go almost unnoticed from markets’ radar screens. Back in December, European government leaders celebrated a big breakthrough on the road towards the banking union, agreeing on the so-called Single Resolution Mechanism (SRM). The SRM should be the institutional counterpart for the Single Supervisor, being able to unwind failing banks. Under the SRM, governments will build up national bank-resolution funds by imposing levies on banks. The funds should gradually be merged into one European pot containing around €55bn over 10 years. The inter-governmental agreement in December was not the last word. The European Parliament (EP), which also has to sign off on the deal, opposed the agreement. In fact, the EP recently confirmed its red lines regarding the SRM, repeatedly stressing that no deal was better than a bad deal. The EP’s criticism of the SRM deal principally follows two main lines: the decision-making process and the size of the resolution fund. In the current set-up it will be hard to rescue a bank during one weekend, but rather it is a long-lasting process. In more detail, the EP wants the ECB to be the only authority to decide whether a bank is "failing or likely to fail". The intervention right for governments should be reduced to zero. This means that resolution actions concerning a specific bank should be decided only at the executive board level of the SRM to avoid political power-games and ensure that banks receive equal treatment, irrespective of their country of origin. The EP clearly wants to avoid a role for the Council in decisions on a bank's resolution. Finally, the EP wants an earlier and faster mutualisation of the national compartments in the Resolution Fund. Up to now, Eurozone finance ministers have been rather reluctant to compromise, while the EP is playing hardball. A compromise between the two parties will not be easy to find – particularly on the issue of decision-making. Comments after last night’s Eurogroup meeting confirmed that finance ministers are struggling to agree on a new proposal for the talks with the EP. In our view, the most likely outcome of finance ministers’ talks should eventually be to move on the issue of earlier mutualisation of the national funds. The negotiations between finance ministers, the EP and the current EU presidency, the Greek government, will officially resume tomorrow. The Greek government has set the deadline to find a compromise to the end of this month. This is needed to allow the European Parliament to still vote on the SRM in April at its last plenary session before the elections. Based on the experiences of the last years, there still is the deeply-rooted belief that European governments should once again succeed in thrashing out a last-minute compromise. However, past successes are not always a guarantee for future success. This time might be different. Two factors argue against a last-minute deal: the European Parliament felt side-lined several times during the euro crisis and might want to make the SRM a litmus test of its increased powers. Moreover, with or without SRM, any costs of possible bank rescues this year as the result of the ECB’s stress tests and asset quality review will have to be carried by national players anyway. The only European element in possible bank rescues this year would be financial support to national governments through the ESM. Over the past years, every time the Eurozone seemed to be in a decision deadlock, it has been a good strategy to bank on the Eurozone’s ability to thrash out a last-minute compromise. This time around, however, there is a significant risk that just banking on past successes might be too little.