Thursday, 19 December 2013

European leaders gather for summit after complicated banking compromise

Angela Merkel and François Hollande

European leaders gather in Brussels on Thursday for a two-day summit aimed at shoring up the euro, pooling economic reform efforts and entrenching a radical new regime for controlling most of the eurozone banking sector. The summit begins after late-night negotiations in Brussels saw finance ministers thrash out a complicated compromise deal that left national governments ultimately responsible for bailing out their banks.
Taken together, the policies amount to the biggest moves attempted by the 17 governments of the single currency since the euro and sovereign debt crisis exploded four years ago. The action being plotted is highly contentious, the policies are divisive. The main issue is what chancellor Angela Merkel of Germany wants, what she does not want, and what she might get in the end.
"They are trying to solve a German problem," said a senior EU official.
The two main innovations are agreements on a key pillar of a new "banking union" that makes the European Central Bank the supervisory authority for the big systemic eurozone banks from next year and a new system of "binding" contracts agreed at the eurozone level to encourage structural reforms in individual countries.

The Germans have resisted and sought to dilute the banking union since Merkel was hijacked at a summit in June last year by France, Italy and Spain and the new regime was agreed. By contrast, the contracts scheme is Merkel's idea, aimed at making weaker eurozone economies more competitive. It is fiercely resisted even by her northern allies in the euro crisis, such as the Dutch, the Austrians, and the Finns. It is feared by the French and the southern Europeans.
But Berlin is making plain that there won't be progress on banking union unless she makes headway on the contracts.
"Ideologically, there is some kind of connection for the Germans," said a senior EU diplomat involved in the fraught negotiations. Another senior diplomat said Berlin was making the linkage "very explicit".
The big contested points on the new banking regime boil down to who foots the bill for a rotten bank or to recapitalise and restructure a failing bank and who has the final word on winding up a bank.
"We've been talking about banking union for months," Merkel told German television. "We Germans have laid down very clear conditions. I do see a chance that we can make it. I just don't know for sure yet."
The Germans have been relatively isolated in their demands, but appear to be carrying the day. Since Lehman Brothers in 2008, European taxpayers have shelled out €1.6tn (£1.3tn) via government bank rescues. Arguing on grounds of moral hazard, Berlin insists that era is over. The banks will themselves, via a levy, supply their own insurance, a €55bn pot that, however, will not be available until 2025 at the earliest. Also, bank investors, creditors and shareholders will themselves have to step up to the plate and pay for failure before governments.
The Germans have been resisting any common "fiscal backstop" for bank resolution, such as the €500bn bailout fund, and have been determined to avoid liability for others' banks until 2025. The French lead the opposition here.
Merkel and President François Hollande wrestled over the issue on Wednesday in Paris hours after she was sworn in for her third term as chancellor, while EU and eurozone finance ministers capped a fortnight of frantic late-night negotiations with more scrapping in Brussels.

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