Euro-Area Banking Union Gains Momentum

Merkel European Summit

There was progress of sorts at the EU summit in Brussels last week, with European Union leaders agreeing to set up a single bank supervisor for the 17 countries that use the euro.


The deal represents a compromise between the Germans and the French: the body will supervise all 6,000 lenders in the euro zone, as the French had required, but there is no exact starting date, which seems to suit the Germans who prefer the go-slow approach.


The agreement comes ahead of next month’s EU summit on the bloc’s long-term budget, which is likely to see EU leaders clash over proposals for a central euro-zone budget and greater EU control of national finances.


European Council President Herman Van Rompuy said that the single bank supervisory mechanism – a key step towards a banking union – would be “up and running in the course of 2013,” according to the Associated Press.


Leaders said they would try to get a legal framework for the body in place by Jan. 1, but as Credit Suisse’s European Economics Research Analyst Axel Lang writes in the bank’s Oct. 22 Peripheral Watch bulletin, it could be as late 2014 before the regulator is “fully functional.”


The starting date for the supervisory body is important. It needs to be operating before the European Stability Mechanism (ESM) – the $500 billion bailout fund officially launched on Oct. 8 to replace the European Financial Stability Facility – can start to directly pump capital into Europe’s distressed banks.


European leaders, however, still have differing opinions on when this should happen.


German Chancellor Angela Merkel wants a slower implementation of the supervisory mechanism, arguing that the quality of supervision is more important than speed – prompting suggestions she was deliberately dragging her feet to avoid making any payments before German elections next fall.


Merkel, of course, denied suggestions she was playing politics and said the goal was to “create something that’s better than what we currently have,” according to Bloomberg.


Italy’s Prime Minister Mario Monti, on the other hand, believes it is not necessary for the bank supervisory mechanism to be “fully in place” before the ESM can start to directly recapitalize troubled EU banks, Credit Suisse’s Lang writes. Despite the political back and forth, Monti says recapitalization by the ESM, at least for Spanish banks, could begin sometime in 2013.



Photo: European Commission