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European banking union looks weak

The much-touted European banking union, designed to separate country and banking risk seen as the nexus around which the sovereign debt crisis has moved, looks weak.

Even aside from Britain’s opt-out, resistance to the banking union is fierce. Earlier this week, Wolfgang Munchau wrote a column in the Financial Times which pointed to gaping holes in the implementation of Europe’s banking union. Wolfgang wrote:

France and Germany have, in short succession, proposed measures to ringfence banks’ proprietary trading activities. The two countries have co-ordinated their moves with each other, but with nobody else. Would not a ringfence be a power any self-respecting banking union would want to usurp?

The answer is that banking will remain a national activity in the eurozone for all economically relevant purposes. The European Central Bank will become the common bank supervisor. This has indeed been agreed. But there will be no common deposit insurance. The resolution system likely to emerge later this year is also flawed. It will end up protecting only the taxpayer of the creditor countries from bank failures in the debtor countries. But it will not accelerate the resolution of the eurozone’s undercapitalised banks. My suspicion is that the ultimate intent of the Franco-German legislation is to secure the position of their national champion banks.”

That’s exactly right. Germany certainly wouldn’t want Deutsche Bank to get into the trouble that WestLB, Commerzbank or any of the other bailed out German banks got into during the subprime crisis. Moreover, we only need to look to German headlines right now to see that the undercapitalised German banking system is under threat. HSH Nordbank, a regional state-owned German bank has warned it expects high losses in 2013 and will need further state guarantees in order to stay afloat (link in German).

Now, we learn from Reuters that Germany doesn’t even want a resolution fund, a cornerstone of the proposed banking union.

The problem is simple. “A resolution fund … is the beginning of (debt) mutualisation and the Germans don’t want to go there,” said one EU official, pointing to a creeping complacency among politicians since the ECB defused market tensions.

“It’s a very tall order to get it completed by the end of the year.”

German national elections in September exacerbate the issue.

“Germany will not commit to anything before the elections,” said Martin Lueck, an economist at UBS, adding that he was nonetheless cautiously optimistic that a deal could be reached afterwards.

Such a delay would bode ill for the ECB, the euro zone’s bulwark against another markets storm. The central bank, which is propping up hundreds of banks across Europe with cheap loans, is growing nervous.

As I wrote in the last member post on David Cameron’s austerity EU budget coup, Europe is completely dysfunctional politically right now. “Europe will only react to events that threaten the euro existentially with dissolution.” We should not expect any policy proposals of merit this year, especially not before German elections. This crisis is not over by a long shot. Austerity economics and gridlock at the political level practically guarantees more trouble to come in Europe this year.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.