Banking union plan triggers row in Brussels

Tue, Sep 4, 2012, 01:00

THE NEW political season in Brussels opened with a row between Germany and the EU Commission over Europe’s proposed banking union, an initiative central to this State’s campaign for debt relief.

After a relatively calm holiday period, EU leaders are confronted with a host of knotty challenges this autumn as Greece struggles to maintain its place in the euro zone and Spain tries to avert a full-blown sovereign bailout.

The immediate focus is on a key European Central Bank meeting on Thursday at which the bank is expected to set out a plan to intervene in bond markets, which Germany’s Bundesbank is resisting.

Although Europe’s leaders have pledged to review the rescue of the Republic’s banks next month, any reduction in the debt load will be contingent on the establishment of a European bank supervisor.

Amid ongoing talks between Irish and European officials, a formal debt relief proposal from the commission is still awaited.

Economics commissioner Olli Rehn has said the commission will produce its plan this month in anticipation of a deal in October.

It is unclear whether any proposal will be put before a meeting of finance ministers next week in Cyprus. For the moment at least, no decision on the Republic is expected at that gathering. The Government believes a deal this autumn, even if it was to be implemented later, would still improve our standing with private debt investors.

At the same time, deepening divisions between Germany and the commission over the scope of the supervisor’s work suggests an agreement on that front will be difficult to reach. EU leaders have agreed that the ECB will carry out the supervisor’s work but Germany and the commission are far apart over how many banks it will oversee.

While Germany insists it should apply to only the largest systemic banks, the commission wants all 6,000 banks in the euro zone to come within its ambit.

In an address last night to MEPs in Brussels, Mr Rehn pointed to the example of Anglo Irish Bank when saying the new supervisor should be empowered to minimise systemic risk from supposedly minor institutions.

“As we have seen in recent years, even small banks can be systemic and cause financial turmoil (Northern Rock, Anglo Irish, Bankia),” he told a European Parliament committee. “Our approach, therefore, envisages an ambitious mechanism with a relatively broad coverage, which will oversee all banks in the euro area, with the ECB at the heart of the system.”

This stance, backed by the wider commission, is at odds with the German view that it is neither feasible nor practical to tackle thousands of banks at once.

Critics in Brussels say Germany’s position is grounded in concern about maintaining local supervision of its network of state-owned Landesbanks, something that would give Berlin greater discretion over their affairs.

However, German finance minister Wolfgang Schäuble said yesterday that the government’s position mirrored that of the central bank.

“The ECB has itself said it does not have the potential to supervise the EU’s 6,000 banks in the foreseeable future,” he said.

While the leaders say the new system must be up and running before they allow Europe’s bailout funds to directly recapitalise banks, Mr Schäuble questioned the commission’s ability to finalise its plan by the end of the year. “I have doubts that this can come so fast,” he said.

Still, he was more optimistic about the prospects for a plan dealing with the largest banks. “With the bigger, systemically relevant banks . . . there is a chance that direct supervision by the ECB could be realised in a foreseeable period of time.”