European Banking Union: Behind the rhetoric

On 8th February 2013, the Texas International Law Journal organised a conference on the theme of  The Nation State and its Banks. Click here for the full program. The organisers were kind enough to invite me to give the lunchtime talk, which I chose to be European Banking Union: Behind the rhetoric. You can here an audio of the talk by clicking Banking Union audio. In brief, my message was that Europe’s leaders agreed to begin the process of forging a Banking Union that is, to all intents and purposes, economically meaningless, at least in the context of the current crisis. If the Eurozone survives, the Banking Union will eventually emerge. But the current moves towards the Banking Union are a cynical attempt to ensure that Europe will not de-couple its banking from its sovereign debt crisis as part of a rational effort to arrest the current crisis; a crisis that is getting worse the calmer the bond markets are becoming under the influence of Mr Draghi’s OMT. In short, the prognosis I offered in my talk was threefold: 

  1. There will be no meaningful Banking Union that helps resolve the current crisis
  2. OMT has created a dead calm but under the surface the crisis is getting worse, primarily because it allows Germany to kill off the June 2012 EU Summit agreement on bank recapitalisations
  3. If the Euro dies, the EU will follow suit. But if the Euro survives, a genuine Banking Union will emerge but then it will be undesirable and impossible for a nation to be in the EU but not in the Eurozone.  For this purpose Mr Cameron is right (most likely for the wrong reasons): there will be no place for Britain in a future, post-Crisis, EU!

For my talk’s outline in greater detail, click…

A. THE EUROZONE’s TRIPLE CRISIS:

  • Europe created a common currency that removed all shock absorbers while ensuring that the shock would come and, when it came, it would be tremendous. Its elements were:  Perfectly separable debts, No lender of last resort (Irish PN), No default mechanism for banks or states.
  • Once the Crisis hit, we observe a failure of Europe’s imagination to imagine a Decentralised Europeanisation of Debt, Banking Losses and Aggregate Investment

B. MY PROGNOSIS: 

  • There will be no meaningful Banking Union that helps resolve the current crisis
  • OMT has created a dead calm but under the surface the crisis is getting worse, primarily because it allows Germany to kill off the June 2012 EU Summit agreement on bank recapitalisations
  • If the Euro dies, the EU will follow suit. But if the Euro survives, a genuine Banking Union will emerge but then it will be undesirable and impossible for a nation to be in the EU but not in the Eurozone.  For this purpose Mr Cameron is right (most likely for the wrong reasons): there will be no place for Britain in a future, post-Crisis, EU!

C. THE INSOLVENT BANKS-BANKRUPT STATES DEATH-EMBRACE: Two examples

  • Unicredit LTRO – Greek state-banks-ECB-ELA
  • EFSF-ESM: Principle of Perfectly Separable Debt and the toxicity of EFSF-ESM bonds

D. THE ROADMAP TO OUR FAKE ‘BANKING UNION’

  • June 2012 – Monti’s desperate stand
  • August 2012 – Schauble’s letter to the FT
  • December 2012 – The Banking Union is announced, reflecting Shauble’s letter, rather than Monti’s stand

A  Banking Union which is “CONFIRMED MORE IN THE BREACH THAN IN THE OBSERVANCE…”

  • Supervision is not the issue – No common deposit insurance – No common resolution mechanism – No direct recapitalisation in lieu of  existing losses
  • France and Germany forming their own banking union to protect their insolvent banks from the ECB
  • OMT removes pressure to effect a proper BU now
  • Zombie banks and insolvent sovereigns will live on

D.  MY PROPOSAL

  • Direct recapitalisation of stricken banks without a Banking Union – at least 0.5 trillion (to 1 trillion) is necessary
  • Replace OMT with ECB bonds
  • Energise the EIB and EIF to become the Growth Pillar of the Eurozone
  • Forge a free trade zone with the USA and let Britain and other non-EZ countries leave the EU