The Euro Crisis: Waiting for German Elections
2012-10-24 By Harald Malmgren
The mid-October Euro Summit illuminated widening divisions between the leadership in France and Germany.
It is the German leadership which is most opposed to a single bank supervisor and a comprehensive “banking union” for the EU. In German politics, a EU banking union is little more than a request from troubled EU member governments for German taxpayer money to bail out their banks.
Although this is still 2012, Germany is already under preparation for its September national elections next year.
At the October Summit, Chancellor Merkel could agree “en principe” to a single EU bank supervisor to be decided early next year, without commitment to what the legal basis and the jurisdiction of such a supervisor might be. Those issues, and the financial backing of an EU banking supervisor would be considered sometime in 2013, most likely after German elections.
A new German parliament would have to decide on any financial commitments, as well as the question of yielding sovereignty over management of German financial markets to a non-German entity. The German Constitutional Court would likely be requested to decide whether this would be legally permitted.
However, it is likely to take some years for the other EU members to acquiesce to transfer of sovereignty over banking, inasmuch as banks in each member nation perform such a wide range of public as well as private services (e.g., local government financing).
Moreover, most EU governments are well aware that their banks are far more troubled than any stress test to date has shown, and remain reluctant to have EU-wide transparency.
In addition, if the new supervisor is limited to a small number of the biggest banks, the British government would be unlikely to yield supervision of the London financial market to a Euro-dominated agency located on the Continent.
The Scandinavians and some of the smaller countries in Eastern Europe may also find insurmountable objections.
In other words, once seriously under discussion, the “banking union” is likely to raise profound questions about the future membership and political structure of the EU.
The German leadership understands this, which allows it to appear flexible without concern for concrete negative consequences for Germany.
To place the October Euro Summit in historic context, nothing new was agreed.
Growing differences between France and Germany threaten greater disarray in the scheduled December Summit, which is OK for the German leadership, which prefers no new commitments before the autumn 2013 German elections.
As for the apparent optimism of financial markets that the Euro sovereign bond crisis is under control, nothing new was agreed that assures against another blowout of yield spreads.
In the meantime, Eurozone banks are shrinking their assets, effectively tightening credit availability in other areas of the world, notably in some of the emerging market economies.
For our look at the Euro crisis and its strategic consequences see