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No end in sight?

Andreas Noll / gswJune 23, 2013

Europe has spent around a third of its economic output in recent years to prop up struggling banks. Member states are trying to reach an agreement that would help spare taxpayers this sort of burden in the future.

A 2-euro coin Photo: Oliver Berg dpa +++(c) dpa - Bildfunk+++
Image: picture-alliance/dpa

Whether in Portugal, Ireland or Spain, it's thanks to billions in taxpayer money that at-risk banks could be saved or at least temporarily stabilized. In the future, however, EU politicians largely agree that taxpayer money should be protected from such appropriations. And there is also widespread agreement that certain rules on banking institutions should be made uniform throughout the EU.

The planned banking union would see three areas of responsibility transferred from the national to the European level: oversight, restructuring and deposit guarantees in banks. But the current attempts to agree to uniform rules for the industry are creating divides within the EU.

The most recent attempt to come to agreement among all 27 EU members failed Saturday (22.06.2013) after long negotiations.


"I am confident that it can be achieved," German Finance Minister Wolfgang Schäuble announced, having just left talks that lasted nearly 20 hours.

The Bankia logo is displayed the Kio Towers, headquarters of Bankia in Plaza de Castilla on June 9, 2012 in Madrid, Spain (Photo by Pablo Blazquez Dominguez/Getty Images)
Spanish banks fear the regulations could scare depositorsImage: Getty Images

It is probable, though hardly guaranteed, that the ministers trying to reach an agreement on the issue will do so during the next session on Wednesday this week.

France's finance minister, Pierre Moscovici, said 90 percent of the work is complete, but there are questions remaining on sensitive regulatory issues. At stake is a significant component of individual EU states' power, which helps explain why the debate has proven so thorny.

EU governments have thus far come to agreement as to how taxpayers will be protected in the future. Taking the case of Cyprus as a model, bank shareholders and investors will be called upon first to cover shortfalls. Furthermore, EU members will be asked to build up national reserves that will be filled by banks in coming years. But controversy remains concerning who should pay what and by when.

First on the chopping block

The ministers did agree to a hierarchy when it comes to bank rescue measures. First, shareholders will be called to task, followed by holders of banks' bonds and then, finally, savers with deposits of more than 100,000 euros ($131,400).

Pierre Moscovici and Wolfgang Schäuble discuss with each other at the meeting Photo: Wolfgang Kumm/dpa
Germany's Schäuble (l) has disagreed with France's Moscovici on some key pointsImage: picture-alliance/dpa

But the devil is in the details. Some want to see shareholders, investors and heavy savers face an 8 percent fee to recapitalize struggling banks. Others view that figure as too high or too low.

"For Germany, it's key that investors and owners - not taxpayers - bear the heaviest burden," said Schäuble, who received support on that point from Austria, Finland and the Netherlands.

But in southern Europe, where the banking sector has faced acute struggles, there is still greater willingness to resort to taxpayer money and customers' savings. The reason is that countries like Spain, Greece or Portugal are afraid that bank customers in their countries will fear losing their savings and empty their accounts, which could intensify the existing crisis in the financial sector.

The ministers also considered whether individual member states should be allowed to decide about making bank customers and bond holders responsible for bank bailouts and, if so, to what extent.

Stricter rules?

Disputes between France and Germany have complicated the negotiations. Moscovici has reservations about saddling bank investors with too much responsibility and would like to see taxpayer money as a continued possibility for bailouts in exceptional cases. The German side insists on strict rules and does not want to be put under time pressure.

"It generates the impression that when it comes to a banking union, Germany is willing to take its time," commented Holger Schmieding, chief economist at Berenberg Bank. "That's okay when the financial markets are relatively quiet, but it would have to be sped up considerably in the event that another acute crisis emerges in the eurozone."

But Germany and France are not the only ones finding themselves on opposite sides of the bargaining table. Rifts have emerged between the northern and southern eurozone member states as well as between countries using the euro and those that are outside the common currency area. Although the banking union project began as a reaction to the turbulence within the eurozone, the proposed rules for financial markets and banking institutions are intended to apply to all EU states. Differences among these institutions in states that use the euro and states that don't make implementing the regulations all the more complicated. While eurozone members are - in the future and after meeting strict conditions - to be able to recapitalize their banks using funds from the shared European Stability Mechanism (ESM), this path is blocked to those outside of the eurozone but still in the EU. As such, it is expected that non-eurozone states will enjoy much more national authority when it comes to banking policy.

Regardless of how the ultimate agreement looks, the end is not yet in sight for negotiations. If the 27 EU governments reach a compromise, that deal still has to be approved by the European Parliament before going into effect.