By Koen Maaskant
Staff Writer
The Eurozone crisis that followed the economic and financial crisis of the past years almost led to the end of the European Project and is still in a very vulnerable phase of restoration. The bankruptcy of several banks and the sovereign debt crisis of countries such as Greece and Ireland have rocked the European Union to its foundation. In order to prevent such events from ever occurring again, European leaders have decided to pursue the introduction of a European Banking Union. This is considered by many to be essential to a stronger Euro and European Union in general.
The most prominent conceptualization of the banking union is a system of three pillars. The first pillar, which the participating European countries reached consensus on a few weeks ago, concerns the common regulation and supervision of the banking system of the Eurozone. The second pillar will provide a common management practice for banks that are facing bankruptcy. Third and lastly, a European deposit guarantee fund would give financial markets and private customers enough confidence and ensure the safety of their deposits.
This specific structure attempts to prevent any Eurozone crisis from happening in the future. More specifically, it should lead to dissolving the link between the financial position of a sovereign country and the financial position of its national banks. In the past, when a country was at risk of not being able to pay back their debt, national banks with high shares of government bonds faced bankruptcy. Vice versa, the banks’ problems led to the increased financial instability of the sovereign countries, which also have to then bail out banks. The mutually injurious system led to the severe crisis of the past years. By moving the supervision, the management of the resolution process, and the deposit guarantee fund to the European level, a better system will emerge.
So, how far are we towards getting this great banking union that will save us from financial trouble? Not far, European leaders have claimed. In October, European leaders reached agreement on the first pillar. Even though the initial plan was that all banks would be under the supervision of the ECB (European Central Bank), the consensus is that only the 130 biggest banks will be under the supervision of the ECB. Reaching this consensus was especially difficult because of the United Kingdom’s position. The United Kingdom was very reluctant to give up its supervising power of the City of London, the financial center of Europe and the most important part of London’s economy. However, after talks with other member states, the UK decided to drop its opposition.
In the coming year, the 130 biggest banks of Europe will have to undergo a stress test, which should reveal all vulnerable assets and liabilities they may have. After these health checks, the ECB should be supervising these banks from the fall of 2014 onwards.
However, this is only the first step in the process of the establishment of the banking union. The second and third pillars are still in negotiations, and are nowhere near functioning. Many European leaders have urged each other to get the banking union functioning as soon as possible in order to gain the trust of the financial markets. Reform is adamantly sought for by one of the most powerful EU member states, Germany. As the biggest economy in the EU, Germany is not keen on having their taxpayers possibly pay for the failure of banks in other European countries. After giving up the argument that the Maastricht Treaty needs to be changed to allow for a banking union, the Finance Minister, Wolfgang Schäuble, now argues that German laws need to be changed in order to transfer sovereignty concerning the second and third pillar to the European level. Many see this as an excuse rather than an actual problem.
However, as emphasized by many, this banking union is essential for the existence of a stable Eurozone and therefore the foundation should be laid for the pillars. In the case a solution is not found, or a very watered-down version of the initial plans are presented, it is extremely likely that the next financial crisis will lead to much more trouble in the Eurozone, possibly threating the European Union with more than it can handle.
Koen Maaskant, class of 2014, is an Economics and Political Science major from Dordrecht, The Netherlands.
