The Banking Union – the E.C.B. and the E.U.
A major step forward fraught with dangers!
With the completion of the Asset Quality Review and the Stress Tests of the Eurozone’s banking system, an important new step has been taken towards European integration, in particular within the European Monetary Union.
One should welcome without hesitation that the published results have demonstrated a significant improvement in the resilience of the banking sector, conducive to restoring the confidence of depositors, shareholders and financial markets in the system as a whole, a necessary precondition for any improvement in the EU’s economy.
From Tuesday 4th of November onwards, the ECB shall assume the task of supervising the EMU’s banking sector, taking direct responsibility for the 130 largest credit institutions that were subjected to the evaluation procedure.
If this major development constitutes the concrete implementation of the first pillar of the Banking Union, instituting a Single Supervisory Mechanism for the sector as a whole, it also marks a radical shift in the balance of powers between various European institutions. Unfortunately – once again – European authorities have failed to keep the citizen informed, burying the essentials under a veneer of highly technocratic verbiage, fully understood only by a limited number of experts.
Conferring the responsibility of the supervision of the banking sector to the ECB constitutes a major transfer of sovereignty, comparable to that which presided over the introduction of the single currency. If “federalists” (among which I count myself) will applaud this breakthrough, it implies necessarily the acceleration of EMU’s political and economic integration: in the absence of any counterweight to the extended powers of the ECB, the institutional disequilibrium will increase as will commensurately the risks of a disintegration of the EMU and the EU.
Indeed, le role of the ECB is often criticised by putting forward two arguments: first and foremost because the ECB’s structural “independence” allows it to perform its exclusive powers shielded from any accountability to a democratically empowered authority; secondly, because the new powers conferred could become a source of internal conflicts of interest increasing the pertinence of the first argument. It is however crystal clear that this weakness results from the failure to complete the process of EMU rather than any flaw in the Bank’s structure. The ECB finds itself without any credible interlocutor – on par with the American or British governments - capable of assuming a responsible dialogue and aiming at establishing a satisfactory equilibrium between the political, economic and monetary components necessary to carry out the effective management of a “single market” sharing a “single currency”.
The strengthening of the ECB’s powers as of the start of the coming month will only exacerbate the feeling that a further significant and unilateral transfer of sovereignty has taken place. This can only lead to direct confrontations between Member States and the ECB when the latter will intervene quite legitimately in areas such as the limitation of sovereign debt bank holdings or the imposition of a major bank restructuring. Such actions will unavoidably be resented as violations of national sovereignty.
If the creation of the Banking Union was accepted as a necessary measure to overcome the sovereign debt crisis of 2011, its consequences have been deliberately withheld. They lead inexorably, by construction, to an ever increasing interdependence of discipline and solidarity among its Members and require setting up new institutions on a federalist model. Having made the decision to unify the blood stream (the monetary and financial system) within a single body (EMU) responding to the beat of a single heart (ECB), it becomes indispensable to coordinate the essential actions of its other organs (Member States) through a shared brain.
This masked approach to the challenge, which is only too characteristic of national political authorities, will be a godsend to euro-sceptics whether representing EMU Members or not; governments will flex their muscles (mimicking the French and Italian gesticulations surrounding the budgetary pact) pretending to their public opinions that they are resisting additional constraints while recognising that they have freely consented to the framework imposed by the Banking Union!
With the implementation of the first stage of the Banking Union, the need for a definitive choice between a “Federal EMU” involving a common budget, own resources and an independent borrowing capacity - or, on the contrary, its dismantling - will unavoidably accelerate. It is incumbent on all those responsible to explain transparently to ordinary citizens the stakes involved in order to avoid that a specific conflict between a Member State and the ECB should lead – by default – to the uncontrolled implosion of the Euro.
Lorgues, 28th October 2014
Paul N. Goldschmidt
Director, European Commission (ret.); Member of the Steering Committee of the Thomas More Institute.
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