Bank nationality and the risks of European banking union

IL SOLE 24 ORE – 26 September 2013

Current economic policies are accentuating the differences between the eurozone members. Under these conditions, banking union, rather than protecting the weaker countries, could accelerate the “mezzogiornificazione” of the European peripheries

by Emiliano Brancaccio

A few days ago, the European Parliament approved a bill that will transfer the functions of banking supervision of eurozone member states to the European Central Bank. There are those who believe that this further sale of stakes in national sovereignty in favour of Community institutions represents the right strategy to overcome the crisis. Calling for “more Europe”, it is said, will force the governments of central and northern Europe to emerge from the nationalist den in which lately they have tended to take refuge.

This strongly pro-European policy is not new to Italy. The EU integration process was in danger of running aground a number of times and was restarted due to sudden acceleration pursued by Italian governments. For example, the direct election of the European Parliament, adopted in 1975 under the impetus of the Italian Presidency, despite the objections of Great Britain and Denmark, and the Single European Act of 1985, signed thanks to pressure from Italy, by a majority vote, against the opinion of Margaret Thatcher.

Especially in times of crisis, however, a strategy based on “more Europe” is likely to produce unpleasant side effects if it is carried out only in some areas while not in other arenas. The completion of the European banking union is a case in point, in this sense .

Supporters hope that the banking union will give early life to the coveted European insurance on deposits. In addition, they claim that the union would allow the ECB to deploy with more information – and thus more vigorously – the invoked role of lender of last resort. According to the proponents, therefore, the transfer of supervisory powers would particularly favour Italy and other peripheral countries of the Union. These countries suffer from the crisis more than others, and they are affected in particular the uncertainties on the financial strength of their banks and the ability of their national budgets to support them in case of emergency. Therefore, the quicker you complete banking union the better for peripheral eurozone countries.

The problem, as several commentators have pointed out, is that to get the European insurance of deposits and lending of last resort we must accept a full transfer to the ECB of decisions on future bank restructuring. This would see the Institute of Frankfurt assume a crucial role in evaluating the solvency of credit institutions and the consequent decisions about the opportunity to promote banking liquidations, mergers and acquisitions on a European scale. However, as has also been reported in the recent warning of economists published in the Financial Times, if the political-economic scenario does not change it is reasonable to expect that the divergences between the macroeconomic indices of the countries of central and peripheral EU countries will persist, with predictable effects on their balance sheets. The consequence is that Italy and other peripheral countries could come to the appointment of restructuring in the uncomfortable role of debtors forced to liquidate the banks under the conditions set by potential overseas buyers.

There are those who believe that the question of the nationality of bank capital is basically secondary. But even among the most convinced Europeans there are those who fear that to completely neglect the issue would ultimately aggravate what Paul Krugman has called the “mezzogiornificazione” of the peripheral countries of the eurozone. The debate is open, but perhaps on a point we could all agree: in a situation where it is hard to see a breakthrough in the convergence of macroeconomic policies, it is hard to imagine how you can shrink the gap between the incomes of the member countries and thus also between the balance sheets of respective banks. Ultimately, the effects of banking union depend on the effectiveness of macroeconomic policy convergence. If these do not work, the banking union could give different results from those desired.

Translation by Revolting Europe

This article was published in Il Sole 24 Ore on September 26, 2013 with the title “Ok l’unione bancaria ma con politiche di convergenza” You can read it in Italian here