Banking union + continuing crisis = referendum (sooner than expected)
By Peter Wilding
Today, all media are focused on the pain in Spain after Spanish borrowing costs hit a record euro-era high amid continuing concerns over Madrid’s bail-out and a Greek exit.
So, with no tools left in the box, up steps EC President José Manuel Barroso who, in an interview yesterday with The Financial Times, urged the EU to bring in new measures to support a banking union as soon as possible. Barroso called on all EU countries to put their large banks under the supervision of a single pan-European structure and indicated that this pan-European structure could be achieved starting from 2013 without actually modifying any EU treaty.
Banking union – to treaty or not to treaty?
Confusingly, the idea that all this can be done on a nod contradicts the German Chancellor who, The Times stresses, said that European countries must be prepared to hand over sovereignty to create a truly effective common banking union, a warning that suggests a new treaty would be necessary. If so, this would finally force the British government to face up to its own contradictory position (you go for full federalism but count us out) on a core national interest – financial services. The perfect storm would trigger a policy yes/no referendum on ceding powers over the City to a European Banking Supervisor but would surely open the floodgates to an irresistible ‘full monty’ vote on whether we stay in the EU or not.
No wonder sage commentators like Danny Finkelstein, who has a direct link to No 10, are now saying that a referendum is a matter of when and not if, only adding the cautionary take that the vote shouldn’t be anytime soon. But the fear must be that banking union by 2013 means a referendum in 2013. Tory MP’s like Chris Heaton-Harris have darkly predicted that the European tsunami would come before 2015. As Barroso’s proposal is supported by Herman Van Rompuy, the President of the European Council of all 27 member states and by ECB President Mario Draghi, little wonder that Europhobes feel the moment of liberation is near.
Referendum – to panic or not to panic?
So far, so troubling for the PM’s date with destiny. The problem is that Barroso’s big idea is fundamentally opposed by the two countries whose full support he needs: Britain and Germany. George Osborne states the UK will not be part of a banking union in which taxpayers would be forced to rescue the banks of other states or in which British banks would be controlled from abroad. According to Financial Times Deutschland, the European Parliament and member states are concerned that the government of David Cameron could boycott plans for a banking union. In view of this, Barroso has already indicated his willingness to compromise, stating that “if Great Britain [sic] does not want to follow the path towards more integration, as it is not a member of the euro area, we should seek a way to take concerns into account.”
That’s all very nice for Dave, but in Germany the government and the Deutsche Bundesbank are paranoid that a banking union might be an incentive for Southern European countries to be lax with budgetary discipline, sources such as FAZ report. Sabine Lautenschläger, Vice-President of the Bundesbank, considers a common banking authority without a collective budget policy impossible. Germany would accept a banking union only if it is linked to the vaunted fiscal union – an idea opposed by France, Italy and Spain.
So, amongst the big three (where it counts), it’s a 2-1 no to banking union without fiscal union. And amongst the big five, it’s a 4-1 no to fiscal union without growth. This sounds to Nucleus like an impasse demanding the diplomatic skills of Metternich to solve. Whatever happens banking union is not coming next year, unless….
Europe – to be or not be?
The Greek elections on Sunday should mean that the maelstrom worsens. However, at a summit of chief executives yesterday, George Osborne let slip the view that Germany will finally save the euro only after Greece leaves, saying cryptically: “I ultimately don’t know whether Greece needs to leave the euro in order for the eurozone to do the things necessary to make their currency survive. I just don’t know whether the German government requires Greek exit to explain to their public why they need to do certain things like a banking union, eurobonds and things in common with that.”
We shall see. But if this cunning plan exists what are the alternatives for Angela? Martin Wolf in the FT today suggests three:
- A federal union with a federal government that finances spending throughout the union, is certainly economically workable. We can safely say that, whatever the position may be a century from now, the eurozone is very far from able to achieve this whatever Merkel hopes for; or
- A transfer union with a system of permanent transfers from richer to poorer member countries. This is surely politically unfeasible. Above all, it is neither necessary nor desirable from the economic point of view; or
- An insurance and adjustment union: Says Martin Wolf:
“By an insurance union, I mean one that provides temporary and targeted support for countries hit by big shocks. By an adjustment union, I mean one that ensures symmetrical adjustment to changes in circumstances, including, changes in financing. Both are necessary and, together, they should be sufficient to ensure a workable union in the long run. These notions would have been unnecessary if original members had been far more similar: the minimal union would then have worked. But that is not what now exists. If the eurozone is to sustain its current membership, it needs a combination of insurance and adjustment.”
That is neither a federal union nor a transfer union. It is a way of making it possible for countries that remain largely sovereign to share a single currency. As Wolf laments: “I do not know whether even this is economically and politically feasible. But if not that, what? And if not now, when?”
Unless Grexit enables the German Chancellor to suddenly change course, bind together banking, fiscal and growth integration and declare to the Germans that they have atoned for history and saved Europe, a Wolf-like muddle through may avoid the British referendum that a crisis without end will one day surely force.
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