Wednesday, September 19, 2012

Will the eurozone bank union be an effective arrangement or another Angela Merkel boondoggle?

Wolfgang Münchau of the Financial Times has the distinction of having written consistently informative and well-reasoned commentary on the euro crisis the last couple of years. In Warum die Bankenunion so wichtig ist Spiegel Online 19.09.2012, he continues the practice, in this one writing about the importance of a banking union.

Bank union, putting European banks under a common EU-wide governance that would displace the mainly nation-based system in effect now, is officially one of the highest priorities of the EU. But, as usual, German Chancellor Angela Merkel is dragging her feet, hoping no doubt as always to achieve maximum German benefit at minimal German cost while doing just enough and no more to deal with the immediate problem. That approach has been working terribly so far. But I think Angie is going for a full-blow world-historical disaster on this thing.

The euro crisis really gets back to the weakness of the European banking system. Trying to prevent German and French banks in particular from being further weakened by a Greek default was what kicked off Angie's just-enough-to-get-by plus austerity-austerity-austerity program in 2009. Which, along with the collapse of investment bubbles in Greece and Spain, triggered various balance of payments issues that now have Germany and the rest of the eurozone locked in what increasingly looks like a financial death-grip with each other.

Münchau considers the bank union process, agreed upon as a priority by EU leaders in June, to be the most important priority among various urgent priorities to turn the EU into a fiscal and transfer union that is the only sure way to save the euro. Münchau sees it as key to solving the "Target 2" problem with the inner-eurozone balance of payments. Target 2 is the clearing mechanism that each eurozone country's national bank uses to balance its national accounts when capital moves from one eurozone country to another. When capital flows are one-side as they have been recently with huge amounts flowing from other eurozone countries into Germany seeking a safer haven in German banks, the German central bank (Bundesbank) in effect loans money to the other central banks. If the eurozone collapses, the other countries' central banks will be off the hook for obligations to the Bundesbank in a clearing mechanism for a currency that no longer exists, and the Bundesbank will have to be recapitalized. With their Target 2 loaning at €800 billion or more, that will seriously sting. As Münchau puts it:

Der Status quo liegt somit auch nicht wirklich im deutschen Interesse, denn jeden Monat steigen die deutschen Überschüsse im Target-2-System und damit das Risiko eines Extremverlusts, wenn die Währungsunion auseinanderbricht.

In einer echten Bankenunion würde die Nationalität einer Bank keine Rolle mehr spielen. Dann würden wir auch nicht mehr von deutschen und spanischen Banken reden, sondern nur noch von Banken in Deutschland und in Spanien. Es gäbe dann keinen Grund für eine Bank in Düsseldorf, einen Kredit an eine Bank in Sevilla abzulehnen. Eine Bankenunion ist ohne Zweifel eine Transferunion. Länder mit starken Banken haften dann für Länder mit schwachen Banken, genauso wie das heute schon im nationalen Bereich erfolgt. Als die Münchner Hypo Real Estate in Schwierigkeiten geriet, da sprang ja auch Berlin ein, nicht die bayerische Landesregierung.

[The status quo therefore also does not represent Germany's true interest, because even month the German deficit in the Target 2 system grows, and therewith the risk of an extreme loss if the currency union falls apart.

In a true bank union the nationality of a bank would no longer play a role. And then we would no longer speak of German and Spanish banks, but rather of banks in Germany and in Spain. Then there would be no grounds for a bank in Düsseldorf to extend credit to a bank in Sevilla. A bank union is without doubt a transfer union. Countries with strong banks would then have a liability for countries with weak banks, just as today already happens in the national arena. When Münchner Hypo Real Estate had difficulties, Berlin also interveneede, not the Bavarian state [provincial] government.] [my emphasis]
An effective bank union, in other words, would create an institutional arrangement requiring the richer countries to regularly transfer funds to the poorer countries in the eurozone, which would eventually reduce the great disparities between the two groups.

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