Unfit for Next Crisis; Laughable Banking Union Revisited

Here is an interesting article in Der Spiegel Online that echoes recent statements of mine. Please consider Der Spiegel Online article: Not Fit for the Next Crisis: Europe's Brittle Banking Union.

German Finance Minister Wolfgang Schäuble has negotiated a European banking union suited perfectly to his country's tastes. It looks like a victory, but it could prove to be very expensive if Europe or Germany face another financial crisis.

Will, Not If

I could easily stop right there, with slight modifications as follows: "It will prove to be very expensive when Europe or Germany face another financial crisis."

Nonetheless, let's continue with the article.

[German Finance Minister Wolfgang Schäuble and his negotiators] succeeded in ensuring that in 2016, the Single Resolution Mechanism will go into effect alongside the European Union banking supervisory authority. The provision will mean that failing banks inside the euro zone can be liquidated in the future without requiring German taxpayers to cover the costs of mountains of debt built up by Italian or Spanish institutes.

They also backed the European Commission, which wanted to become the top decision-maker when it comes to liquidating banks. The Commission will now be allowed to make formal decisions, but only in close coordination with national ministers from the member states.

But it goes even farther. Negotiators from Berlin have also created an intergovernmental treaty, to be negotiated by the start of 2014, that they believe will protect Germany from any challenges at its Constitutional Court that might arise out of the banking union.

They also established a very strict "liability cascade" that will require bank shareholders, bond holders and depositors with assets of over €100,000 ($137,000) to cover the costs of a bank's liquidation before any other aid kicks in. The banks are also required to pay around €55 billion into an emergency fund over the next 10 years. Until that fund has been filled, in addition to national safeguards, the permanent euro bailout fund, the European Stability Mechanism, will also be available for aid. However, any funds would have to be borrowed by a national government on behalf of banks, and that country would also be liable for the loan. This provision is expected to be in place at least until 2026.

The government in Berlin put a strong emphasis on preventing the ESM, with its billions in funding, from being used to recapitalize debt-ridden European banks. Schäuble was alone with this position during negotiations, completely isolating himself from the other 16 finance ministers from euro-zone countries. Brussels insiders report that it was "extremely unusual because normally at least a few countries share Germany's position."

A Victory for Whom?

To have succeeded in pushing all this through is a huge victory for the finance minister, particularly given that he was able to do so while he was at the same time defending his own job during coalition talks to form Chancellor Angela Merkel's new government in Berlin.

But is this really the right kind of agreement for Germany and Europe?

I invite you to read the rest of the article which accurately concludes with "Schäuble's triumph could prove to be a costly one, because what could be yet more expensive than a crisis without a banking union? The answer is simple: A crisis preceded by a poorly constructed banking union that promised illusory security."

Laughable Banking Union Revisited

Next consider what I said two days ago in Laughable Eurozone Banking "Non-Union"; Expect Disorderly Breakup.

Expect Disorderly Breakup

Lost in the debate about "impressive sums", is the simple fact there should not be a banking union in the first place. In practical terms, there still isn't, but no one wants to admit that.

And given that there isn't a genuine union (which is the only way to realistically hold this mess together a bit longer), the eurozone ministers ought to focus on a meaningful task: how best to break up the eurozone with minimal disruption.

Unfortunately, they won't. Thus, the resultant eurozone breakup will prove to be very disruptive. The only other possibilities (and I have mentioned them before) are 1. slow growth and extremely high unemployment in the peripheral countries for another decade 2. Germany and the Northern countries pony up hundreds of billions of euros in more support (debt forgiveness, not loans).

Pick your poison, but a breakup is the most likely result.

Emphasis added.
I am sticking with my analysis.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com