Yesterday, 17 June 2021, the meeting of the Eurogroup in inclusive format ended without any decisions on strengthening the Banking Union (including the common European Deposit Insurance Scheme EDIS). At the Euro Summit in December 2020, the heads of state and government had called for preparing “a stepwise and time-bound work plan on all outstanding elements needed to complete the Banking Union” by yesterday. The negotiations were suspended on Tuesday and will be continued only after the German federal elections in autumn.
A progress report by the Portuguese Council Presidency on the strengthening of the Banking Union demonstrates the main conflict lines. In view of the considerable Covid debt in many member states, the German demand to implement measures to reduce the sovereign exposures on bank balance sheets proved to be insurmountable at this point. Germany was completely isolated with its demand to exclude the institutional protection schemes, which cover about 20% of covered deposits in the Eurozone, from EDIS.
MEP Sven Giegold, financial and economic policy spokesperson of the Greens/EFA group commented:
“For a strong euro, we need the completion of the Banking Union. On the whole, Olaf Scholz’ plans for the Banking Union have failed. The finance minister’s big words were not followed by deeds. It was a failure by design. By insisting on demands that were clearly unacceptable to most of Europe, the German government has made any compromise impossible. To complete the Banking Union, we need risk reduction in bank balance sheets and the preservation of institutional protection schemes. But in view of the massive Covid debt, it was just the wrong point in time to get serious about capital requirements for government debt. And Scholz’s demand to completely exclude institutional protection schemes and thus 20 percent of covered deposits was only met with disbelief in Europe. Germany is isolated in the negotiations.
Through this failure, the German government also risks delaying the urgent corrections in the bank resolution rules. This is irresponsible in view of the looming credit defaults after the Covid crisis. The current resolution rules offer too many loopholes and continue to allow the bailing out of banks with taxpayers’ money. The German government’s blockade could cost European taxpayers dearly. This is also a failure of the entire Council. The member states first rejected the proposals of the EU Commission and then tried to play legislators themselves. The result is a paper that documents disagreement on all relevant issues instead of a proposal. The Council should admit its failure as an author of legislative proposals. The EU Commission must now exercise its right of initiative and present a comprehensive proposal for strengthening the Banking Union.
Of great importance for the Banking and Capital Markets Union is an efficient insolvency law in all euro countries. The German government has failed to push for strong insolvency rules in the Eurozone. This would be more important and more realistic than capital requirements for government bonds, which the German government has insisted on during the negotiations. As ECB chief, Mario Draghi had repeatedly pushed for a common insolvency regime for the financial sector. Now with Draghi as Italian prime minister, there is an opportunity to move forward in Europe. Scholz is missing this opportunity. Joint liability for bank resolution and deposit insurance needs uniform and efficient recovery of claims by financial institutions.
When it comes to the enlargement of the Eurozone, we must not repeat the mistakes of the past. It is good that Bulgaria and Croatia first had to become members of the Banking Union. Not only must inflation and exchange rates be stable, but new euro countries must also bring corruption and financial crime under control. Before further steps follow, governments must get serious about fighting money laundering and crime in the financial system. While Croatia is making good progress, far too little is happening in Bulgaria. Especially in the smaller Bulgarian banks, corruption and cronyism are still prevalent. The ECB is also shying away from cracking down on the issues. Most small and medium-sized banks have still not been thoroughly checked. The Bulgarian member of the SSM Supervisory Board was previously the CFO of First Investment Bank, which is known for severe governance problems, and would probably fail the ECB’s suitability test for bank managers himself. If we do not solve the problem at its root, we might end up with a second Latvia. The Eurogroup must significantly increase the pressure on Bulgaria here.”
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