The path to banking union
At their final summit this year, leaders of the European Union concentrated on plans to deepen banking regulation but postponed several steps in their wider commitment to create a “genuine economic and monetary union”. Since much of the work required to fulfil that commitment involves making progress on a credible banking union capable of withstanding market pressures on the euro, this is not necessarily a big setback. There is an inner logic linking progress on banking reform to deeper economic integration in the longer term, despite political hesitations and disagreements, and the market pressures will not go away next year either.
Agreement to create a “single resolution mechanism” opens up a prospect of funding bank rescues from the industry by way of levies or taxes. Since it would take time to build up a fund, state finance would be required initially; but the objective is to make the anti-crisis backstop neutral for public finances in the medium term. That breaks new ground and may provide a mechanism to deal with legacy debts distinct from the existing plans for a European Stability Mechanism. Several EU states still resist using the ESM for past rather than future debts, so this could be an alternative.
It is of great interest for Ireland that a way be found to deal with this issue, and there is already such a commitment. Levels of public and private debt here are unsustainable in the long term – and the same applies elsewhere in the EU. Deep questions of sovereignty and solidarity are raised which political leaders are slow to tackle head-on other than in a crisis. That has been the pattern of EU decision-making for the last few years and observers detected a certain lack of such urgency at this summit. Proposals from the council president Herman Van Rompuy for a more definite road map and timetable towards pooling economic sovereignty, and possible treaty change, were removed from the conclusions, but the subject matter is certain to return to the agenda.
Nor should the commitments already made be underestimated. Agreement to co-ordinate EU budgets will involve much greater intrusion from Brussels and other member states on domestic policymaking. This prolonged crisis has been a rapid learning curve for all those who want see the euro survive. As with the limited but important steps towards a banking union, they need to measure policies against the risk of the euro failing or the zone disintegrating, which would be increased if only large banks are involved or if the resolution fund is too small.
Germany’s policy of resisting the pooling of economic sovereignty until strict conditions have been put in place has so far been the dominant influence on the process, as its elections loom. But that is only likely to delay more far-reaching decisions.