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Germany a Hurdle to European Unity on Banks Germany a Hurdle to European Unity on Banks
(34 minutes later)
BRUSSELS — European Union officials presented long-awaited plans on Wednesday in hopes of ending the vicious circle in which bailouts of failing banks endanger government finances and the euro currency.BRUSSELS — European Union officials presented long-awaited plans on Wednesday in hopes of ending the vicious circle in which bailouts of failing banks endanger government finances and the euro currency.
But first they must face down Germany.But first they must face down Germany.
Even as officials here laid out their blueprint, the uncompromising stance of German officials like Wolfgang Schäuble was ringing in their ears.Even as officials here laid out their blueprint, the uncompromising stance of German officials like Wolfgang Schäuble was ringing in their ears.
A day earlier, Mr. Schäuble, the German finance minister, sternly warned the European Commission “to be very careful” with its proposal for a single authority to oversee the wind-down of troubled banks because “otherwise, we will risk major turbulence.” A day earlier, Mr. Schäuble, the German finance minister, warned the European Commission “to be very careful” with its proposal for a single authority to oversee the wind-down of troubled banks because “otherwise, we will risk major turbulence.”
It was in keeping with Germany’s longstanding resistance to sharing financial risk with other European countries. But it was at odds with the more unified approach to European problem-solving that Brussels wants.It was in keeping with Germany’s longstanding resistance to sharing financial risk with other European countries. But it was at odds with the more unified approach to European problem-solving that Brussels wants.
“Germany’s intellectual starting point is national resources for national problems, and that is some way off the European Commission’s proposal, which is looking for a European solution,” said Mujtaba Rahman, the director for Europe at the Eurasia Group. If the proposal fails, he said, there is the danger that “the problematic link between banks and sovereigns will actually have been reinforced, not weakened.”“Germany’s intellectual starting point is national resources for national problems, and that is some way off the European Commission’s proposal, which is looking for a European solution,” said Mujtaba Rahman, the director for Europe at the Eurasia Group. If the proposal fails, he said, there is the danger that “the problematic link between banks and sovereigns will actually have been reinforced, not weakened.”
The plan presented on Wednesday by Michel Barnier, the European commissioner overseeing financial services, was conceived as part of a broader European banking union whose other provisions would include a single banking supervisor and an agreement to impose any losses mainly on a bank’s creditors and shareholders, rather than taxpayers.The plan presented on Wednesday by Michel Barnier, the European commissioner overseeing financial services, was conceived as part of a broader European banking union whose other provisions would include a single banking supervisor and an agreement to impose any losses mainly on a bank’s creditors and shareholders, rather than taxpayers.
The program, dubbed the Single Resolution Mechanism by Mr. Barnier, would rely on the European Central Bank to signal when a financial institution in the euro area was facing severe difficulties. The program, called the single resolution mechanism by Mr. Barnier, would rely on the European Central Bank to signal when a financial institution in the euro area was facing severe difficulties.
A resolution board, supported by a staff of around 300, and made up of representatives from the central bank, the European Commission and member states of the union, would then make a recommendation, as necessary, on how to shut down or shrink a bank. The board also could draw on a shared fund to help shut down or radically restructure failing lenders after creditors and shareholders have borne some losses. A resolution board, supported by a staff of around 300, and made up of representatives from the central bank, the European Commission and member states of the union, would then make a recommendation, as necessary, on how to shut down or shrink a bank. The board also could draw on a shared fund to help close or radically restructure failing lenders after creditors and shareholders have borne some losses.
European Union officials want the size of the fund to be about 70 billion euros, or $90 billion, by the time it is fully financed by 2025, with money coming from levies on banks.European Union officials want the size of the fund to be about 70 billion euros, or $90 billion, by the time it is fully financed by 2025, with money coming from levies on banks.
There would be limits to the power of the new centralized system. It could not, for example, order the closure of a bank without permission of the host government if doing so would result in that country’s taxpayers footing some of the bill. There would be limits to the power of the new centralized system. It could not, for example, order the closing of a bank without permission of the host government if doing so would result in that country’s taxpayers being liable for some of the bill.
The process was aimed at “involving all relevant national players,” Mr. Barnier said at a news conference Wednesday. But, he said, central management is vital to “allow bank crisis to be managed more effectively in the banking union.”The process was aimed at “involving all relevant national players,” Mr. Barnier said at a news conference Wednesday. But, he said, central management is vital to “allow bank crisis to be managed more effectively in the banking union.”
Giving such a central role to the European Commission, the European Union’s executive arm, could irk both Germany and France, according to some analysts.Giving such a central role to the European Commission, the European Union’s executive arm, could irk both Germany and France, according to some analysts.
That “clearly contradicts” a proposal signed jointly by France and Germany ahead of the last summit meeting of E.U. leaders in June, Philippe Gudin, an economist at Barclays, wrote in a research note. Discussions, slated to begin in September among finance ministers, “will likely be long and lively” with the risk of delays because of a lack of agreement, he wrote. That “clearly contradicts” a proposal signed jointly by France and Germany ahead of the last summit meeting of European leaders in June, Philippe Gudin, an economist at Barclays, wrote in a research note. Discussions, scheduled to begin in September among finance ministers, “will likely be long and lively” with the risk of delays because of a lack of agreement, he wrote.
Mr. Barnier said he wanted the system up and running by January 2015. That would require agreement over the course of next year.Mr. Barnier said he wanted the system up and running by January 2015. That would require agreement over the course of next year.
For now, Germany is the country raising red flags.For now, Germany is the country raising red flags.
The key sticking point is the call by German officials like Mr. Schäuble for a change in the European Union’s treaties before acceding to anything more than a network of national authorities to handle bank failures. The central sticking point is the call by German officials like Mr. Schäuble for a change in the European Union’s treaties before acceding to anything more than a network of national authorities to handle bank failures.
Treaty changes would be cumbersome and time-consuming process that could take years, if they succeeded at all.Treaty changes would be cumbersome and time-consuming process that could take years, if they succeeded at all.
Many other countries would resist opening up the treaties to changes at a time when Britain is already seeking modifications that many other member states oppose. Another reason to be wary of such an initiative is that Europe’s economic problems have made many citizens so disenchanted with the Union that they might very likely vote down any treaty changes. Many other countries would resist opening up the treaties to changes at a time when Britain is already seeking modifications that many other member states oppose. Another reason to be wary of such an initiative is that Europe’s economic problems have made many citizens so disenchanted with the European Union that they might very likely vote down any treaty changes.
Germany, alone, would not be able to block the proposal under the bloc’s voting rules. But major legislation in Europe usually reaches the statute books only when there is consensus.Germany, alone, would not be able to block the proposal under the bloc’s voting rules. But major legislation in Europe usually reaches the statute books only when there is consensus.
“Germany really wants to make sure that its national authority ends up resolving German banks,” said Sony Kapoor, the managing director of Re-Define, a research group and consultancy based in London.“Germany really wants to make sure that its national authority ends up resolving German banks,” said Sony Kapoor, the managing director of Re-Define, a research group and consultancy based in London.
Other analysts sought to downplay the seriousness of German opposition, suggesting that it might be posturing for domestic political consumption before the country’s coming national elections. Other analysts sought to play down the seriousness of German opposition, suggesting that it might be posturing for domestic political consumption before the country’s coming national elections.
“You’re likely to see a softening of the German position after the election in September,” said Holger Schmieding, the chief economist at Berenberg Bank.“You’re likely to see a softening of the German position after the election in September,” said Holger Schmieding, the chief economist at Berenberg Bank.
“You also have to remember that Germans want rules, and the new supervisor in place,” said Mr. Schmieding, who was referring to the expected takeover by the European Central Bank of oversight of about 150 of the largest banks in the euro area during 2014. “The closer we get to that point, the more willing the Germans will be to put money on the table,” said Mr. Schmieding. “You also have to remember that Germans want rules, and the new supervisor in place,” said Mr. Schmieding, who was referring to the expected takeover by the European Central Bank of oversight of about 150 of the largest banks in the euro area during 2014. “The closer we get to that point, the more willing the Germans will be to put money on the table,” Mr. Schmieding said.
That may be necessary, well before the system is up and running.That may be necessary, well before the system is up and running.
Looming on the horizon is a series of banking stress tests — audits the central bank is expected to conduct next year to assess whether major lenders can withstand economic shocks. The tests are widely expected to reveal a clutch of previously undiagnosed problems in the banking systems of countries that could include France, Italy and Spain.Looming on the horizon is a series of banking stress tests — audits the central bank is expected to conduct next year to assess whether major lenders can withstand economic shocks. The tests are widely expected to reveal a clutch of previously undiagnosed problems in the banking systems of countries that could include France, Italy and Spain.
Bankers praised the proposal for seeking to simplify the handling of cross-border crises. But some immediately moved to limit the amount they would need to contribute to the shared fund. Guido Ravoet, the chief executive of the European Banking Federation, an industry group, called in a statement for limiting the fund’s size for “at least 15 years.”Bankers praised the proposal for seeking to simplify the handling of cross-border crises. But some immediately moved to limit the amount they would need to contribute to the shared fund. Guido Ravoet, the chief executive of the European Banking Federation, an industry group, called in a statement for limiting the fund’s size for “at least 15 years.”
Mr. Ravoet said that rules provisionally agreed to last month by European finance ministers to shift most of the losses in bank failures to creditors and investors, rather than imposing them on taxpayers, “would absorb all or most of the cost of a bank failure in most circumstances.”Mr. Ravoet said that rules provisionally agreed to last month by European finance ministers to shift most of the losses in bank failures to creditors and investors, rather than imposing them on taxpayers, “would absorb all or most of the cost of a bank failure in most circumstances.”