Banking union seems to be the latest step in the EU’s post-crisis creditor-led path of austerity and one that could potentially put the final nail in the EMU’s coffin by exacerbating core-periphery imbalances and even increasing the risk of banking crises. www.socialeurope.eu
On 1 January 2016 the EU’s banking union – an EU-level banking supervision and resolution system – officially came into force. The move to a banking union has been the most significant regulatory outcome of the crisis – ‘a change of regime, rather than an act of institutional tinkering’, as Christos Hadjiemmanuil of the London School of Economics writes in a comprehensive paper on the topic – and it is widely agreed that ‘even in its current incomplete form, [the banking union] is the single biggest structural policy success of the EU since the start of the financial crisis’. A closer look, though, reveals the banking union – as it stands at least – to be simply the latest step in the EU’s post-crisis creditor-led path of austerity and asymmetric adjustment and one that could potentially put the final nail in the EMU’s coffin by exacerbating core-periphery imbalances and even increasing the risk of banking crises.
In its original intention, the banking union was supposed to ‘break the vicious circle between banks and sovereigns’ by mutualising the fiscal costs of bank resolution. This was the result of a belated acknowledgement by European decision-makers of the need to relieve individual countries of the fiscal responsibility for bank-rescue operations and put an end to the fragmentation along national lines of banking and monetary conditions (rightly deemed to be one the main causes of sovereign distress in the monetary union). The establishment of a joint public funding mechanism – a so-called common ‘fiscal backstop’ – for the whole euro area was considered essential for this purpose. The prerequisite for a mutualisation of bailout costs, however, was the centralisation of the responsibility for banking supervision and resolution in the euro area, so as to preclude the externalisation of the fiscal costs of regulatory failure by countries with lax regulatory regimes. Such were the considerations that drove European leaders on 29 June 2012 to explicitly affirm the need to break the ‘vicious circle between banks and sovereigns’, adding that ‘when an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly’.
In the course of constructing the banking union, however, something remarkable happened: ‘the centralization of supervision was carried out decisively; but in the meantime its actual premise (that is, the centralization of the fiscal backstop for bank resolution) was all but abandoned’, Christos Hadjiemmanuil writes. Within a year, Germany and its allies had obtained:
