Wednesday 26 September 2012

EMU fatally undermined by the Koenigstedt Declaration

Has all the progress over the last 6 months been undone? The painfully slow summitry of the European Council has proven to be an inadequate firefighter, but there had been some movement towards a banking union and a working economic union. The biggest criticism was that European leaders were putting in the safeguards against the next crisis rather than trying to deal with the crisis we're currently in, but in last June's Euro Area Statement, the European Council finally seemed to have got it (PDF):

"We affirm that it is imperative to break the vicious circle between banks and sovereigns.


When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly."

Finally! Banking union and economic union are based on this logic: that the financial markets are too big for the Eurozone Member States to deal with on their own, and that there needs to be a common regulatory policy, and the means to deal with problems posed by the banks. The statement even signalled support for breaking the link between sovereigns and existing banking debt as a way of  lessening the debt burden for crisis-hit states (especially Ireland and Spain, who stuck to the Stability and Growth Pact criteria):

"The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally."

However Germany, Finland and the Netherlands have not only set out to turn back the clock on this progress, but to fatally undermine the rationale behind banking union as a concept. In Koenigstedt the three countries declared not only that there will be no deal on existing banking debts that have been taken on by European sovereigns, but that national sovereigns will have to take on banking debt until they have reached their capacity before the ESM should step in to fund the banks directly:

"We agreed that the implementation of the European Semester, including budgetary discipline and targets, in all countries remains key to ensuring financial stability; the ESM and the other crisis mechanisms can only play a supplementary role to these policies that are decided at the national level.


 Regarding longer term issues, we discussed basic principles for enabling direct ESM bank recapitalisation, which can only take place once the single supervisory mechanism is established and its effectiveness has been determined. Principles that should be incorporated in design of the instrument for direct recapitalization include: 1) direct recapitalisation decisions need to be taken by a regular decision of the ESM to be accompanied with a MoU; 2) the ESM can take direct responsibility of problems that occur under the new supervision, but legacy assets should be under the responsibility of national authorities; 3) the recapitalisation should always occur using estimated real economic values; 4) direct bank recapitalisation by the ESM should take place based on an approach that adheres to the basic order of first using private capital, then national public capital and only as a last resort the ESM.

[Emphasis mine]"

 Far from breaking the link between banking debts and the sovereign, this reinforces it. It states that the order of debt responsibility in the Eurozone is: private, national sovereigns, then the ESM, creating an order for future crises that follows our current debt and banking crisis. Far from pointing towards a sustainable solution for the crisis and a workable Eurozone, this wilfully ignores the lessons of the past 4 years and tries to cement the current Eurozone order.

Why then should we have a banking union at all? The idea behind the banking union is that the financial sector is truly European (and global), and that it needs to be regulated and controlled in common - national authorities are too small and weak to deal with the sector own their own anymore. If it is to be a national responsibility for now and all time - the Konigstedt direction - then why bother with European regulation and oversight? Where is the added value or common purpose to this?

Why this step? Is it because of the ECB's open commitment to bond-buying, and the (current) creditor states want to seize back as much control and initiative as possible? Whatever the reason, it's hard to see this unilateral redirection of the Eurozone as any help for any sense of common purpose at European summits. What's the point of Ireland, Italy, Portugal and Spain waiting for summit time to try and shift the consensus constructively if other Member States start undermining the process of common negotiation? At this rate, they should start holding summits and economic seminars of their own to promote their alternative vision of economic union and crisis resolution - after all, Germany et al have shown their contempt for common decision-making.

It's truly mind-boggling to think how self-absorbed the ministers at this Koenigstedt meeting must be. Not content with vague signals and behind-the-scenes work, they've simply decided to wreck all agreement up 'til now. Diplomacy is not the word.

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