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It's just a pipe dream

Germany will never support Jose Barroso's idea of a banking union

india Updated: Jun 14, 2012 00:49 IST

The Spanish banking bailout has been roundly booed by the markets, so it must be time for a new big idea. Here's one: Jose Manuel Barroso, president of the European Commission, is urging all European Union (EU) countries to adopt a banking union, meaning centralised supervision of banks, a cross-border guarantee scheme for depositors, and an EU rescue fund for failing banks.

This certainly counts as a grand vision. But could it really be put in place by next year, as Barroso suggested recently? Not a chance. The central flaw is obvious: Germany isn't about to agree overnight to underwrite banks in Spain, Portugal and elsewhere in exchange for a pledge that a supercharged banking supervisor would prevent foul play. The danger of a banking union, as the Bundesbank was quick to say, is that weak banks could be stuffed with sovereign debt to lower artificially the cost of borrowing for a struggling sovereign. That's a formula for making strong members of the eurozone directly liable for the debts of the stragglers. It's wishful thinking to believe that Angela Merkel could be bounced into such a commitment - at least not before fiscal union has happened and been seen to work, a process that would take many years.

Indeed, the structure of the Spanish bailout is evidence that a ringfenced rescue fund for banks is currently a non-starter. The euro 100-billion is being directed through the Spanish government and will count as national debt. The euro leaders knew (let's assume) they were running the risk that Spain's cost of borrowing would soar (as it has) but chose that course anyway because it was the only politically viable option.

So what's Barroso's game in pushing for banking union? May be he believes a few ingredients of his idea could survive German objections, and so convince investors that a decisive step has been taken towards fiscal union. That, too, seems like wishful thinking.

The only unproblematic element of banking union is the notion of a common banking supervisor in the eurozone. But that's only easy to agree because it doesn't alter current arrangements dramatically. There are already Basel III rules for banks on capital thresholds and liquidity and even a pan-European regulator, in addition to national supervisors. Adding a further layer of centralisation wouldn't amount to much, as investors would quickly realise.

One is left with the explanation that the euro authorities are running out of ideas. The surge in Spanish and Italian bond yields, to 6.74% and 6.17% respectively, says as much.

The Guardian

First Published: Jun 14, 2012 00:48 IST