Well, it’s official (pending approval). The ‘second pillar’ of the EU’s banking union — a 55 billion euro bail-out fund and a bunch of new rules — appears to be in place following recent negotiations. It was an all night compromise bender! Yes, lots of compromises were made, but the core principles that have emerged during the EU’s multi-year-long quest for a banking union are still intact. Those principles being, of course:
1. Bail-ins by depositors and creditors should be expected for bank failures before the bail-out fund is tapped. In other words, it’s the ‘Cyprus Solution’ of bail-ins for the entire EU so it’s potentially fairer to smaller nations in that respect.
2. The banking union can’t be too forgiving. Nations with ailing banks should have the minimal help needed to avoid a complete catastrophe. The joint bank bail-out fund shouldn’t be large enough to actually solve a large banking crisis. Smaller nations should still remain disproportionately vulnerable because the bailout fund, itself, will be so small that any serious crises will quickly overwhelm the fund and leave the remaining liabilities on the individual nation. At that point, it’s troika-time!
3. The eurozone member nations, which are presumably more inclined to a mutual pooling of liabilities given the shared currency, will not actually share those liabilities in the event that the bail-out fund is spent even though that was a central tenet of the original banking union idea.
4. Banks shouldn’t be allowed to treat their national debt as ‘risk-free’, a move intended to minimize the ‘bank-sovereign nexus’ where domestic banks load up on domestic government debt because it’s given favored ‘risk-free’ status. It’s been a proposal championed by Bundesbank chief Jens Weidmann. As Greece demonstrated, sovereign bonds in the EU aren’t necessarily ‘risk free’ because bondholders just might be forced to take a trip to the bond-barborshop. In theory, preventing risk-free sovereign bonds should prevent the concentration of a nation’s debt in its own banking system. In reality, it might accomplish that goal, but it will probably also exacerbate any existing “sovereign debt bank nexus” problems if implemented poorly and generally goes against the spirit of a real “union” by emphasizing a “each member is on its own” attitude.
5. The minimally helpful plans should be hailed as a triumph of compromise, practicality, and fairness.
Yes, the second pillar in the EU’s banking union is a triumph of compromise, practicality, and fairness:
Europe strikes deal to complete banking union
Thu Mar 20, 2014 8:33pm GMT
(Reuters) — Europe took the final step to complete a banking union on Thursday with an agency to shut failing euro zone banks, but there will be no joint government back-up to pay the costs of closures.
The breakthrough ends an impasse with the European Parliament, which persuaded euro zone countries to strengthen the scheme. It completes the second pillar of banking union, which starts at the end of the year when the European Central Bank takes over as watchdog.
The accord means that the ECB has the means to shut banks it decides are too weak to survive, reinforcing its role as supervisor as it prepares to run health checks on the still fragile sector.
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Michel Barnier, the European commissioner in charge of regulation, said the scheme would help to bring “an end to the era of massive bailouts”.
“The second pillar of banking union will allow bank crises to be managed more effectively,” he said.
Thursday’s agreement makes it harder for EU countries to challenge the ECB if the central bank triggers bank closures, and establishes a common 55 billion euro back-up fund over eight years — quicker than planned but far longer than the ECB’s watchdog had hoped.
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Notice that the compromises include establishing the 55 billion euro bail out fund in eight years, which is sooner than expected but far longer than the ECB’s new watchdog had hoped. It raises the question of the time frame the ECB’s Watchdog would have preferred for the full funding of the too-small fund? 5 years? 3 years? Now?
Continuing...
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But the new system, which Barnier conceded was not ‘perfect’, has shortcomings.For one, the ‘resolution’ fund is small and would, in the view of the ECB watchdog, be quickly spent. To remedy that the fund will be able to borrow to replenish spent money.
Euro zone governments will not, however, club together to make it cheaper and easier for it to do so.
The 18 euro zone countries do not intend to cover jointly the cost of dealing with individual bank failures, a central tenet of the original plan for banking union.
Germany resisted pressure from Spain and France to make such a concession. Its finance minister Wolfgang Schaeuble welcomed new rules forcing bank creditors to take losses and that “the mutualised liability ... remained ruled out” — a reference to sharing the burden of a bank collapse.
Neither will there be any joint protection of deposits.
DEADLY EMBRACE
Almost seven years since German small business lender IKB became Europe’s first victim of the global financial crisis, the region is still struggling to lift its economy out of the doldrums and banks are taking much of the blame for not lending.
The banking union, and the clean-up of banks’ books that will accompany it, is intended to restore their confidence in one another. It is also supposed to stop indebted states from shielding the banks that buy their bonds, treated in law as ‘risk-free’ despite Greece’s default in all but name.
Under the deal reached, a fund made up by levies on banks will be built up over eight years, rather than 10 as originally foreseen. Forty percent of the fund will be shared among countries from the start and 60 percent after two years.
It also envisages giving the European Central Bank the primary role in triggering the closure of a bank, limiting the scope for country ministers to challenge such a move.
Mark Wall, Deutsche Bank’s chief euro zone economist, said new rules to impose losses on the bondholders of troubled banks would reduce the burden on the fund but warned that its size was too modest. “A cross-European fund of the size of 55 billion raises some eyebrows in terms of scale,” he said.
The fund will be able to borrow against future bank levies but will not be able to rely on the euro zone bailout fund to raise credit. Critics say this means primary responsibility for problem lenders remained with their home countries and that the banking union will never live up to its name.
“The key to the banking union is an authority with financial clout. They don’t have it so we don’t have a banking union,” said Paul De Grauwe of the London School of Economics.
“The whole idea was to cut the deadly embrace between bank and sovereign. But if a banking crisis were to erupt again, it would be back to how it was in 2008 with every country on its own.”
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Let’s review some of the details being proposed:
— A 55 billion euro bailout fund is being created from levies on banks. The CEB Watchdog say this is much too small and could be spent quickly.
- It will take 8 years for the fund to be fully financed, less than the planned 10 years but much longer than the ECB watchdog was hoping for.
- The 55 billion euro fund can borrow against future blank levy’s but it can’t rely on the eurozone bailout fund (which makes sense since this banking union includes eurozone and non-eurozone members).
- And, due primarily to German opposition, the 18 eurozone members states are not going to be jointly funding for the bailouts, even though joint funding was one of the original central tenets of the banking union. There will also be no joint protection of deposits (it’s the third pillar of the banking union, so some scheme involving). So the smaller nations or those with weaker economies should probably be expecting some sort of troika following any future major financial crises.
- Once the 55 billion euro fund is exhuasted, “it would be back to how it was in 2008 with every country on its own”.
The More Things Change, the More They Stay the Same In the Banking Union. Via Veto Power
If the above plan doesn’t sound very likely to succeed keep in mind that there’s nothing preventing corrective changes to the banking union in the future. Except for the veto-power of individual member states. Yes, because this was an inter-governmental agreement, individual members need to agree to future changes and hold an implied veto power. So while the banking union may be here to stay, it doesn’t have to stay the same. But it easily could:
Financial Times
A highly imperfect banking union
Eurozone banks and sovereigns remain tightly embraced
March 23, 2014 5:01 pm
EditorialTwenty months ago, at the height of the sovereign debt crisis, EU leaders vowed to shore up the eurozone’s financial system by building a “banking union”. The aim was to end the deadly embrace between governments and banks that had proven catastrophic for countries such as Spain and Ireland. Never again would a single member state have to deal with a banking crisis alone, as its partners would help by sharing some of the burden.
Last week the journey towards the EU’s most ambitious integration project since the creation of the euro came to an end. After a 16-hour negotiation, the European parliament and member states agreed to create a unified system for handling banking crises. The so-called “single resolution mechanism” is one of the building blocks of a banking union. The other cornerstone – removing from national regulators the powers to supervise the eurozone’s largest banks and attributing them to the European Central Bank – had already been laid last year.
Constructing a banking union was always going to involve uneasy compromises between states. Early in the negotiations it became clear that Germany was opposed to the idea of building a common guarantee scheme that would protect small depositors in case of a bank failure. But while this part of the plan was abandoned, the hope was that the other elements of the banking union would not be watered down. Alas, the opposite has happened.
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Most importantly, the promise that eurozone members would share the burden of rescuing or resolving a bank has been forgotten. True, the extensive use of “bail-in” rules means that bondholders will finally face the true cost of the risks they take. But after that the financial responsibility for saving a bank will largely fall on the shoulders of an individual government. As for banks that need to be shut down, at just €55bn the common resolution fund is tiny and, anyway, will take eight years to build.
One would worry less about these imperfections if it were clear that the agreement would be improved at a later stage. But this will be difficult. For example, since the single resolution fund was included in an inter-governmental agreement, member states will retain veto powers over subsequent changes. Germany, which is terrified of anything that involves a mutualisation of liabilities, is unlikely to give much ground.
The eurozone risks being stuck with a flawed banking union until the next crisis. This places a greater onus on the ECB. The central bank is undertaking a forensic audit of the balance sheets of the institutions it will supervise to ensure they hold enough capital. This assessment must be credible and put the largest banks in position to withstand the next shock. After this week’s deficient agreement on banking union, any mistake risks being extremely costly.
Yes, “since the single resolution fund was included in an inter-governmental agreement, member states will retain veto powers over subsequent changes. Germany, which is terrified of anything that involves a mutualisation of liabilities, is unlikely to give much ground.”. And if Germany isn’t giving much ground, ground probably isn’t going to be given at all. That just how things work. It’s the implied sixth principle of the banking union:
6. He who has the gold makes the rules.
So does this implied veto right by member nations mean that a clearly questionable banking union is now the law of the land? Indefinitely? Well, perhaps, but that doesn’t mean there aren’t other possible positive changes coming as a result of the new union. For instance, one of the unambiguous positives to the new ‘bad bank’ resolution scheme is that it takes us one step closer to resolving the the previous ‘bad bank’ resolution schemes. As Berlin recently made clear, those previous really bad ‘bad bank’ resolution schemes that bankrupted entire countries and mandated troikas aren’t going to get resolved until the entire banking union is set up. So, as bad as many the new banking union seems with the announcement of these new proposals, at least it gets us closer to undoing the last horrible banking scheme:
Irish Times
Germany dampens hopes of Irish bank recapitalisation from ESM
Schäuble rules out mutual liability of EU member statesSuzanne Lynch, Derek Scally
Fri, Mar 21, 2014, 01:00
Germany has dampened expectations of imminent bank recapitalisations for Irish banks from the European Stability Mechanism bailout fund after yesterday’s agreement on a further pillar of the European banking union.
After 16 hours of talks through the night, European Union member states and the European Parliament agreed final details of a single resolution mechanism (SRM) to wind up failing banks.
Taoiseach Enda Kenny welcomed yesterday’s agreement as another “essential” stage in the euro area’s post-crisis path towards a banking union.
“This means that we’re moving towards the endgame in terms of having the structure put in place by which matters of recapitalisation can be considered,” he said, speaking on his way into a summit of EU leaders in Brussels. “And, as I’ve always said, that will apply on a case-by-case basis by the end of the year.”
German finance minister Wolfgang Schäuble agreed that yesterday’s deal marked a “great step forward for Europe” on the banking union, which he described as the “greatest European projection since the introduction of the euro”.
Mutual liability ruled out
While the political deal represented a sensible compromise, with Berlin giving ground on key points, Mr Schäuble insisted that it “still rules out mutual liability of participating member states”. Berlin officials were circumspect about the time it would take to complete the banking union’s final lap. For now, they said, Berlin’s priority was “pouring the SRM deal into a concrete structure”.“Only then can we look further,” said a finance ministry spokesman.
After agreement in December 2012 on a single supervisory mechanism for banks, the SRM is the second of three pillars of Europe’s banking union with talks still outstanding on a third: a common deposit insurance fund. Until all three are in place, and the banking union is operational, Berlin declines to entertain even discussion of recapitalisations. The idea of establishing a common European banking deposit insurance fund is highly unpopular both with German banks and German savers and is likely to trigger a prolonged political debate there.
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Note that the German Constitutional Court very recently ruled that a direct recapitalision of Ireland banks would indeed be constitutional, removing a major hurdle to this needed step. But don’t expect any recapilisations any time soon since, as mentioned above, Berlin is declining to entertain even discussion of bank recapitalizations until all three pillars are in place for the new banking union. And the third pillar — deposit insurance — has yet to even be addressed and is likely to trigger a prolonged debate. So the Ireland, the ‘good student’ that has been holding out for recapitalisation for years, is going to have to keep waiting.
Continuing...
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Late-night haggling
Yesterday’s agreement between member states and the European Parliament under the co-decision process follows agreement among member states in December. The centralised resolution body and accompanying €55 billion fund will be responsible for winding-up struggling banks.After late-night haggling, including a reported 5.30am phone call to Mr Schäuble, euro-group president Jeroen Dijsselbloem emerged with a deal at 7am.
It has been seen as favouring smaller countries such as Ireland because it accelerates the pace at which the €55 billion fund will be fully mutualised. (The first SRM draft proposals envisaged a 30 per cent mutualisation in the first three years, with full mutualisation only after a decade.)
This was one crucial concession European Parliament negotiators wrung from Germany; another was reducing from 10 to eight years the transition period during which a pool of national funds would shift towards a shared fund.
Mutualisation
The revised package also brings forward mutualisation: 40 per cent in the first year; 20 per cent in the second year; and the rest equally over a further six years.According to Dutch MEP Corienn Wortmann-Kool the resulting resolution process will treat banks equally regardless of their home country.
“We want bail-in of creditors and investors to be applied in the same way to all banks irrespective of the member states these banks are located in,” she said, using the example of Ireland as compared with larger states such as Germany and France.
The plan agreed by member states in December would have seen, for example, French or German banks backed by a large fund allowing moderate bail-ins. An Irish bank with a smaller national fund would, under draft proposals, have been forced into a deeper bail-in, leading to higher funding costs, she said.
“This would definitely not be what we want to achieve in terms of breaking the link between sovereign and banking debt,” she said.
The agreement also envisages that the European Commission, rather than member states, will approve decisions made by the SRM’s board on resolving banks. MEPs were anxious to limit political interference from member states, though finance ministers will still have power to intervene in certain cases.
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So it’s bad, but not all bad, right? At least it wasn’t “definitely not be what we want to achieve in terms of breaking the link between sovereign and banking debt” like the proposed plan in December was where the larger members would have larger bail-out funds. Instead, everyone shares in the too-small-too-succeed bailout fund.
The EU’s ‘Mutual’ Fund Has ‘Eye-Opening’ Non-Mutual Benefits
Additionally, notice how the ‘compromise’ is being spun as “favouring smaller countries such as Ireland because it accelerates the pace at which the €55 billion fund will be fully mutualised.” As the article points out:
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The plan agreed by member states in December would have seen, for example, French or German banks backed by a large fund allowing moderate bail-ins. An Irish bank with a smaller national fund would, under draft proposals, have been forced into a deeper bail-in, leading to higher funding costs
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What does this mean? Well, basically, the 55 billion euro bailout fund isn’t fully funded or fully “mutualised” for 8 years. There’s a transitionary phase of 8 years when the fund builds up. During this phase the funds are separated between “national” funds and “European funds” and money in each nation’s “national” compartment is only available for bailing out that nation’s bank. In other words each member is sort of on their own when it comes to dealing with a banking crisis during this transition period. But the degree to which a country is on its own will go down each year as the fund grows in size and become increasingly “mutualized”. But, again, it’s going to take 8 years for this process to be completed and 8 years can last a LONG time when you’re in the midst of some sort of socioeconomic experiment gone horribly awry.
So the recent changes made in the compromise agreement really would reduce the risk assumed by the smaller states because that’s what mutualisation does. By speeding up the overall time frame from 10 to 8 years and by speeding up the mutualisation schedule from the 10 year schedule proposed in December it really does reduce systemic risk (otherwise insurance wouldn’t really work). So this is quite an accomplishment, right?
Well, as we already saw above, mutualisation is indeed helpful but that helpfulness is dramatically limited by the fact that the bailout fund is limited to 55 billion euros.
Sure, 55 billion euros sounds like a lot of money, but keep in mind the Ireland, alone, spent 85 billion euros bailing out its private banks and this basically bankrupted the country (require an additional bailout and endless austerity...and the ongoing need for recapitalisations). Portugal need 78 billion euros. Once that 55 billion euro bailout fund is expended the liabilities fall back on the member nations. So bailouts are mutualised, but only to an extent that would have been inadequate for dealing with virtually ALL of the crises we’ve seen thus far.
Still, we can be a bit relieved that the newly proposed bailout fund scheme is an improvement over the proposal in December. By pushing up the funding schedule from 10 to 8 years and increasing the mutualisation rates the new scheme is probably fairer overall. At least, it’s hopefully a fairer arrangement between the larger nations (like Germany and France) and the smaller states like Ireland.
As the following article points out, however, there’s still a question of fairness between the larger states. Yes, in what turned out to be quite an “eye opener” last week, it looks like France, and not Germany, will be paying more into the bailout fund than anyone else and “mutualisation” will dramatically bring down Germany’s overall share for the 55 billion euro fund. Given the intense opposition by German negotiators to the very idea of mutualisation, this wasn’t the expected outcome:
Financial Times
March 17, 2014 4:41 pm
France and Germany squabble over who pays for EU banking unionBy Alex Barker in Brussels
France and Germany are squabbling over who should foot the bill for Europe’s banking union, with Paris fearing its banks will pay the biggest share towards a €55bn rescue fund.
As the EU enters a potentially decisive week in talks on a central system for handling bank crises, France is fighting plans to make its sector of big universal banks the leading contributors to the common insurance plan.
It is one of several highly political issues that remain unresolved with days left before a Wednesday deadline to agree legislation with the European parliament, so that it has time to pass before the European elections.
Although it is highly technical, the dispute over the bank levy cuts across some fraught EU issues: whether the rescue system is genuinely European or actually partly national; whose banking system is most risky; and therefore whose lenders should pay more for insurance. France, Spain and Portugal have all submitted papers on the topic.
One senior diplomat said the breakdown of contributions was an “eye opener”, given that Germany, the EU’s biggest economy, is leading resistance to increasing the heft of the rescue fund or accelerating its mutualisation.
“Everyone put up with [Germany’s] antics because they thought it was the German banks that pay by far the most, but that isn’t quite true. It is the French banks that will fund this party,” the official said.
Some MEPs think it right that complex, “too big to fail” banks pay more. Sven Giegold, a German Green in the parliament negotiating team, said he was “appalled” by member states’ attempting to rig the calculation, to “give a subsidy to risky banks”.
A French informal position paper, circulated on Friday, lays out rough estimates showing the variance in national contributions depending on the method used. One big factor is whether the funding target – expected to be around 1 per cent of covered deposits – is set at European level or national level.
Under a European target France’s highly concentrated banking sector, including BNP Paribas and Société Générale, is on the hook for 21 per cent of the fund, slightly more than Germany’s more deposit funded sector.
By contrast, if the target is set at national level, the contributions of German banks would rise to 35 per cent, while France’s remain at 21 per cent. Berlin fought hard to limit the contributions of its big savings bank sector to the central fund.
France argues that given the fund is established with national compartments that are gradually broken down over 10 years, the European target level should also be phased in. This would leave French banks paying 21 per cent, or around €11bn, while German lenders would pay 28 per cent, around €15bn.
“Using a reference to national target level during the transitional period is consistent with the existence of national compartments,” the French paper argues, pointing out that a failing bank’s access to rescue funds varies according to its home state.
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That might have seemed like a lot of jargon. Here’s the critical part:
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Under a European target France’s highly concentrated banking sector, including BNP Paribas and Société Générale, is on the hook for 21 per cent of the fund, slightly more than Germany’s more deposit funded sector.By contrast, if the target is set at national level, the contributions of German banks would rise to 35 per cent, while France’s remain at 21 per cent. Berlin fought hard to limit the contributions of its big savings bank sector to the central fund.
France argues that given the fund is established with national compartments that are gradually broken down over 10 years, the European target level should also be phased in. This would leave French banks paying 21 per cent, or around €11bn, while German lenders would pay 28 per cent, around €15bn.
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Keep in mind that the above article was written days before the latest deal, so the earlier bailout fund schedule was still on the table (10 years for financing the fund and slower mutualization) but the overall dynamic described hasn’t changed with the new deal. Now notice the point made by the French negotiators at the time: The bailout fund is established with national compartments that are broken down and merged into the “European” compartment as the fund gets mutualised. If the contributions where set at the “national target level”, Germany’s banking sector would be on the hook for 35% of the 55 billion euro fund. But at the “European level” the German banks are only liable for 20% of the fund. The French banks, on the other hand, appear to be on the hook for 21% either way. So, somehow, the formula used for the “mutualisation” of liabilities seems to dramatically slash the German liabilities without impacting the French banking sector at all. Banks can have different structures and risks, so this isn’t entirely surprising that the formulas chosen can have different impacts on different banking sector. But, again, the opposition to debt mutualisation has been the strongest in Germany and yet, in the end, debt mutualisation appears cut the German liabilities by 42%! It helps explain why this scheme was such an ‘eye opener’.
You Say Mutualise, I Say Mutualize. Let’s Call the Whole Thing Off All Create A Limited Liability Company
Still, our eyes shouldn’t be too wide with surprise by the new EU banking New Deal and its quirky funding formulas because it wasn’t simply “mutualisation” of the bail-out fund that Germany has been opposing this entire time. It’s the “mutualisation” of ALL potential liabilities that Berlin has been fearing.
Sure, the “mutualisation” of the 55 billion euro fund appears to reduced Germany’s bailout liabilities for the 55 billion euro fund, but that’s not where the major saving for Germany are accrued. The major reduction in German liabilities (and the liabilities of any leading European economies in the future) come from the fact that the “mutualisation” of liabilities is capped at 55 billion euros. That’s the major ‘eye-opener’ in this plan because once that 55 billion euro bailout fund gets used up nothing else gets mutualized and the relevance of the banking union effectively ends. The EU, at the end of the day, is a limited liability company for nation states. That’s the unifying principle underlying the banking union. My Brother’s Keeper, LLC.
And why kind if banking union “crisis resolution” power will a nation state LLC have? One that appears to intentionally create of a scheme that is unable to handle anything other than a small, single-nation banking crisis coupled with a very serious threat of “Troika Time!” for any member states that that find themselves in need of national bailout. In other words, it’s a preventative approach. The EU’s new plan for dealing with a crisis is to have a bank crisis resolution scheme that is so completely inadequate that member nations will preemptively curtail excesses in their banking systems simply to avoid the possibility of needing a national bailout (and more Troika timeouts). It’s the ‘all stick, no carrot’ approach to creating a union.
But will it work? Can it work? After all, we’re talking about a banking union within a European union. Can unions rooted in conflicts of interest, a lack of trust, and a deep aversion to burden-sharing actually survive in the long run? If so, is a limited liability company really the kind of long-term relationship the EU wants to be?
Wouldn’t the E-“U‑and-Me” be better?
Uncle Sam and Il Duce
Well isn’t this reassuring: Lithuania is scheduled to ditch its currency and join the euro in January 2015 and that has German conservatives on edge. Why? Because Lithuania is going to be the 19th eurozone member, and 19 is sort of a magical number the way the treaty was written. Once more than 18 members are in the EU, the five nations with the largest financials sectors will no longer get 5 permanent votes on the ECB council. Instead, Germany, France, Italy, Spain and the Netherlands are going to have to start sharing 4 votes on a rotating basis which means each of them will be without an ECB council vote once every five months. Not surprising, this is has a lot of Germany’s policy makers freaked out and asking for a treaty change to give Germany a permanent vote. Germany’s Finance Ministry has said that it has no intention of a treaty change. At least no intentions, “at the moment”:
As we can see, it’s not only the AfD calling for giving Germany a permanent seat on the ECB council opposing. Some of Merkel’s own CDU members are calling for a permanent German seat too. So when Germany’s Finance Ministry says that it doesn’t see any reason to change the treaty “at this time”, the obvious next question is “ok, so when is as good time?” A sudden financial crisis that overwhelms the existing bailout structure (created in the new EU banking union) could be such a catalyst. Or how about a slow motion political crisis?
Note that the statement, “its core supporters are not rabid xenophobes, as Germany’s mainstream parties have seemed to suggest, but church-going traditionalists who believe in conservative family values”, sort of leaves out the AfD’s problems with far-right infiltration and the use of slogans alarmingly close to the NPD’s during last fall’s elections.
Continuing...
Could the rise of the AfD bring about the rise of a reactionary CDU? We’ll see. But keep in mind that with the way the banking union is structured — with a 55 billion euro fund that observers view as far too small to deal with another EU-wide financial crisis — the possibility of future financial crises morphing into a political crisis is still very acute. A bailout scheme that inevitable requires its own bailout probably isn’t going to be politically viable in Germany once the next crisis hits. So a revisitation of the structure of the ECB’s governing council may not be on the agenda “at the moment”, but it’s probably going to happen sooner or later.
Here’s something to watch: The ECB is rewriting the rules for the big banking stress tests after Germany’s banks balked at some of the provisions. The first complaint relates to the confidentiality requirement for the results the ECB is planning on communicating to banks on the results of their stress test in advance of making the results public. German banks are making arguing that such an agreement could run foul of Germany’s market disclosure laws. And the second complaint is over the fact that this private disclosure period is only 48 hours before the results are made public, which the banks say is too little time. So now the rules are changing:
So there appears be significant concern about the reporting of these stress test results coming from Germany’s banks which seems a little odd given the relative strength of the German banks compared to the rest of the EU. And yet, as the article below points out, “in particular, bankers are concerned that the 48-hour window does not give them time to contest the ECB’s findings if a large capital shortfall is discovered.” So is a “a large capital shortfall” expected at this point?
It’ll be interesting to see how the rules are changed. It’ll also be interesting to see which large German financial institutions would have had reason to be concerned about what to do in that 48 hour period if their stress tests showed a large capital shortfall...
Here’s an update on the looming banking stress tests: Deutsche Bank might be in the clear for a capital shortfall. Commerzbank, on the other hand, might have a bit of a problem. And it’s not the only one:
So it sounds like Deutsche Bank has probably already raised the capital it needs but Commerzbank might fall short. And Nicolas Veron of the pro-austerity Peterson Institute is predicting that the banking stress tests are going to cause much more significant, long-term impacts than the markets appear to be expecting although, in the article below, it’s not Commerzbank that faces the biggest shakeup. It’s the publicly owned banks, like the German Landesbanks, that are the likeliest to be overhauled and/or privatized:
Could we be seeing the beginning of the end for the Landesbanks and other publicly-owned EU banks? As Nicholas Veron of the Peterson Institute indicated, there’s an incentive for the ECB to “play tough” in order to avoiding “owning” any future crises, and it sounds like the publicly owned banks are clearly in the cross hairs of institutions like the IMF and OECD (and the major private banks presumably wouldn’t mind forced privatizations of their publicly owned brethren). So it’s certainly looking like a major overhaul/privatization of the EU’s public bans could be on the way.
And since the IMF and OECD also have greater profitability in mind as one of the goals of a public sector banking overhaul, it’s worth pointing out that the German Landesbanks’ big dive into risky securities and lending practices was precipitated by a 2001 change in the laws that scheduled the removal of the Landesbanks’ state-backing by 2005, raising their borrowing costs and helping to fuel property bubble across the EU by causing a chase for higher yielding investments. So that previous attempt to reduce the link between Germany’s banks and the public sector (a link that new EU bank bailout rules are designed to sever across the EU) ended up encouraging the kind of behavior that led to the situation requiring a large number public bailouts for the Landesbanks anyways after the financial crisis. It’s a reminder that profitability and stability are generally mutually contradictory in the world of finance which is important to keep in mind since it looks like both greater profitability and stability are the goals going forward...unless all of the “too big to fail” banks are preemptive shrunk down to a “small enough to fail” size. Something’s got to give.
Here’s another followup on the looming shake up in the EU financial system following the stress tests next month: It’s an article from 1999 discussing the fight between Brussels and Berlin to strip the state backing of the Landesbanks. And that’s certainly a legitimate topic for debate, especially for banks that played as significant roles in the financial bubbles outside of their home countries like the Landesbanks. But it’s notable that the private banks, including Deutsche Bank, were amongst the biggest backers of stripping the state guarantees in part because the Landesbanks could lend at cheaper rates vs their private sector partner not only because of the state backed guarantees but also because they didn’t need to be quite as profit-oriented as their private counterparts. Today, the Landesbanks have already lost their state guarantees although they still got bailed out with much of the rest of the banking sector, they’re still publicly owned, and that public ownership has an implied state backing (although that implied public backing could change with the new EU banking union). So this public vs private dynamic is something to keep in mind should public banks across the EU end up failing the stress tests because there’s little reason to believe Deutsche Bank and the other big private banks that wanted to gobble up the public banks back in 1999 aren’t still hungry:
And here’s a 2010 piece that make the point that even after the 2005 loss of state guarantees, the Landesbanks were still a source of reduced profits for the German private banking sector. And the private banks were still pissed about it:
Keep in mind that the reduced need for profitability is something the OECD and IMF are currently expressing a desire to change when your read things like:
So, while the role the Landesbanks played in fueling bubbles outside of Germany is clearly something that shouldn’t be repeated, it’s looking more and more like public banking, even for domestic lending, is about to undergo a strange pro-profit public/private assault in the new EU. Is that in the public interest?
Back in the spring of 2014, a hint of despair was in the air. Everywhere. At least everywhere that counts. Would the boom years of financial trading ever return? Maybe, but maybe not. You don’t see a financial public/private bubble-nanza clusterf#ck like what took place in the lead up to the 2008 financial meltdown everyday. That was a special kind of financial public/private bubble-nanza clusterf#ck. And maybe one of the kind. The “good times” for the big banks and trading houses that profit for volatility and volume (defined as the times right before and right after the 2008 bubble burst in this case) might never return. At least, that was the fear last year:
Yes, as of the spring of 2014, the profits from “FICC” (fixed income, currencies and commodities) were well off their bubbly highs as new regulations began clipping bankster wings a bit, leading many to wonder if a new era was upon us where the FICC’s fraction of the financial sector’s bottom line is permanently shrunk:
Only 70 percent. Will the good times ever return? Maybe, but not yet:
Flash forward to today and the FICC squeeze for the banks continues as regulations mandating higher capital requirements take hold. Will there ever be any relief for the people of the FICC?
Well, while the FICC activity may still be contracting for a number of banks, it’s not always contracting, as the article hinted:
Yes, whenever a crisis breaks out, it’s always a little tempting to says something like “well, the Chinese word for ‘crisis’ is ‘opportunity’! It’s all good!” At least, it’s always a little tempting to say if you don’t speak Mandarin and don’t realize that the word for ‘crisis’ isn’t actually ‘opportunity’. But that doesn’t mean a crisis can’t also be an opportunity. Like an opportunity to reverse the regulatorily mandated pledges you recently took to reduce your FICC exposure:
Ok, so the Greek crisis this year introduced so much volatility into the financial markets, expecially the bond markets, that the big banks like Deutsche Bank and Barclays are going back on their pledges to reduce their fixed-income risks because it’s just too profitable not to do.
Mental note: Big Banks LOVE the eurozone’s dance with death.
But as the article also pointed out, now that the Greece crisis has lulled a bit (for the moment), all that volatility that was driving this sudden surge is at risk of withering away.
What’s a large bank that’s reliant on market volatility for its profit margins to do? Here’s an option: do nothing. And just wait for who’s ‘Netxit’:
What are the big risks that might determine who’s ‘Nexit’ in the ‘-exit’ queue? Let’s see...
So events like disappointing economic growth (a recession) or growing fiscal obligations (which one would expect in any nation with an aging population and/or recessions) might be destabilizing enough to the Portugal, Ireland, Spain (three austerity poster-children), Italy, and maybe even France, to force these countries into a ‘Nexit’ situation. Or maybe the eurozone economies become decoupled for whatever reason and the ECB ends up implementing a policy that’s the opposite of what needed for the weakest economist (those on the ‘Nexit’-list need)? Either way, the ‘Nexit’ candidates just might end up in a situation where they either have to choose to pay their debts or pay their people. Or leave the eurozone altogether so they have a chance to both pay their debts, pay their people, and actually stimulate growth but at the brutal cost of sudden economic dislocation.
A recession, aging, or just a decoupling of the national business cycles...that’s all part of what could bring on a ‘Nexit’. It’s a rather alarming assessment considering that all of these potentially dire scenarios are also pretty inevitable. If the regular cycles of business happen or societies age, a variety of eurozone member states just might find themselves caught in Greek Tragedy. And given the deep flaws in the eurozone’s structure and the demonstrated political will to do nothing to alleviate those flaws, that means it may not be the worst time to familiarize yourself with eurozone crisis trading and investing strategies.
Investing in your own future might be a rather difficult in countries across the eurozone, especially if you have a lot of your future ahead of you, but at least FICC volume should pick up again every time one of the eurozone member states is thrust into a “pay or not to pay, or exit” situation. Hooray.
Here’s another reminder that the structural problems with the eurozone due to a lack of monetary sovereignty aren’t limited to a lack of freedom to set central banking interest rates. If you’re a country like Greece facing a major crisis, you also lose the guarantee that your new shared central bank will even perform basic central banks obligations like being a lender of last resort:
Now that we’re looking at a situation where Greece is being forced to implement an austerity package that’s just more of the same and that basically everyone thinks can’t work, this really can’t be emphasized enough: The troika created a bank run and collapsed Greece’s economy when the ECB decided to stop acting like a normal central bank in order to squeeze the Greeks during the negotiations:
“But that was a manageable problem as long as the European Central Bank did its job as a lender-of-last-resort, and loaned Greece’s banks cash in return for hard-to-sell assets. The ECB stopped doing that, though, and Greece’s banks had no choice but to close for a few weeks or else close for good.”
Yes, the showdown between Greece and the troika was a manageable showdown. But then the ECB decided that slowly strangling the Greek economy was an appropriate use of its central banking independence in stark contrast to prior pledges to “do whatever it takes” to keep the eurozone held together.
Hmmm...something must have strongly influence that independent ECB thinking. What could it be? It’s a total mystery.
Something happened on the way to Greece’s smooth completion of the Troika’s demands in order to release the funds needed to recapitalize Greece’s banks. It’s something that should sound familiar at this point: The Troika made a demand that would make life a lot worse for a lot of people, Greece said “hey, this is insane,” and since the Troika is also insane another Greek/Troikan showdown might be on the way:
“Athens wants protection from foreclosures to cover property values of at least 200,000 euros. Lenders insist the threshold should not exceed 120,000. Greece calculates that would cover only 17 percent of mortgage holders.”
That appears to be the crux of the matter: both sides agree that there should be a threshold level below which Greeks are protected from foreclosure on their primary residences. Greece wasn’t it at 200,000 euros, down from the existing 300,000 euro level, while the Troika is insisting on a 120,000 threshold. So both sides agree that there should be some sort of protection for poor Greek homeowners, but it’s a question of how cheap their house should be in order to qualify for that protection.
And note that when you read:
keep in mind that the ECB’s repeated decisions to significantly restrict the emergency lending available to Greece’s banks during the negotiations with the Troika this spring and summer didn’t exactly help the lending situation either.
Also note that when you read:
it’s nice that France is going to be make Greece’s case to the rest of the Troika as this dispute unfold, but as with all tussles with the Troika, having France on your side is nice, but probably not nice enough, as evidenced by today’s declaration by the ‘Eurogroup’ of eurozone finance ministers that no funds will be released for the recapitalization of Greek banks until the foreclosure laws (among others) are passed, which they expect Greece to do this week:
Yep, if Greece doesn’t pass the foreclosure law soon (and all the other Troikan demands), Greece’s banks won’t get the recapitalization funds that were a key part of the “bailout” agreement and, presumably, its economy melts down since this whole bailout was about conceding austerity reforms in exchange for urgently needed bank recapitalizations and public debt restructuring.
And when you read:
keep in mind that France’s finance minister did at least stick up for Greece during the recent Eurogroup meeting when he pointed out that actually, other eurozone nations have similar foreclosure protection laws
“Still, some backup for Athens came from French Finance Minister Michel Sapin, who said earlier Monday that limits on foreclosures also exist in other eurozone states. “People shouldn’t make demands on Greece for something that goes further than in their own country,” he said. ”
So let’s compare and contrast the statements coming from the eurogroup of finance ministers:
VS
At least Greece is getting a mass foreclosure law imposed on it with at least a bit of verbal support along the way (solidarity is complicated in the eurozone).
And note the argument made by Germany’s finance minister Wolfgang Schaeuble, that the non-performing loans need to be foreclosed on because they’re the main cause of problems at the Greek banks:
And now let’s relate that rationale to that given by eurogroup chief Jeoren Dijsselbloem in the previous excerpt for why the eurogroup’s demands must be met: passing the mass foreclosure the law would have “a direct impact on the number of bad loans that banks would have to deal with through recapitalization”:
And, to some extent, Dijsselbloem and Schaeuble do have a point. The fewer homes that are under foreclosure protection, the more banks will know in terms of how much additional capital they’ll need, and getting those bad loans off the books would indeed help Greece’s banks and broader economy.
But that’s also assuming that the process of forcing mass foreclosures doesn’t simultaneously tank the economy and cause even more bad loans. It’s a type concern that folks like Dijsselbloem and Schaeuble have been largely unwilling to consider when it comes to the impact of virtually all the austerity measures they have been demanding from one country after another, but when the issue of foreclosure protection came up in Greece two years ago, there was actually one major group that you might not expect to champion such policies that didn’t appear to mind the foreclosure protections. And it was specifically due to fears of what mass foreclosures to do to both Greek banks’ balance sheets and the broader Greek economy. And that group was, of course, the big Greek banks holding all those bad loans:
Yes, almost two years this was the argument from Greece’s own banks: mass foreclosures will tank the economy and our balance sheets. Please. Don’t:
Hmmm...so either the situation has substantially improved in Greece’s economy over the last couple of years to the point where mass foreclosures won’t have a massively negative impact on the Greek economy and social cohesion or this is just another example of the Troika, well, being the Troika.
Regardless, it’s looking like Greece’s is probably about to face a wave of foreclosures. And given the urgency of the situation, it’s probably going to be facing that wave soon. Why so urgent? Well, it isn’t just that those big banks need to be recapitalized sooner or later. Thanks to new EU banking union law, if Greece doesn’t resolve this impasse with the Troika before January, any future bank recapitalization schemes will happen after these new laws take effect. And those laws, which impact the entire EU, means a Cyprus-style “bail-in” raiding of Greek bank deposits to help pay for recapitalization will suddenly be required:
That’s right, under the EU’s new law, modeled after the Cyprus experience, Greek depositors could end up being “liable for plugging capital shortfalls” in the banks that are on the verge of collapse largely because the Greek economy collapsed. And that eventuality could come about if Greece doesn’t placate the Troika by November 15th:
So it’s looking like, once again, there’s a busy week of negotiations ahead for Greece and its creditors. And, once again, Greece’s EU brethren are perfectly willing to let Greece know that if it doesn’t rapidly accept the Troika’s potentially highly damaging demands even greater socioeconomic damage will take place instead.
In other words, a number of major ‘pro-business’ changes are heading towards the EU and especially Greece. And it looks like they’re going to further trash the place. Because it’s business as usual.
At least France appears to be giving Greece a smattering of public support. Could be worse!
Part of what makes the ongoing Greek Tragedy so tragic is the hellish nature of the situation the Troika has imposed on Greece. Meaningful debt-relief is simultaneously demanded by the IMF and refused by the EU and the one thing the two sides can agree on is that Greece implement the self-reinforcing austerity regime. And there’s no real vision for a future economy that doesn’t involve widespread poverty and insecurity. Just a neoliberal Field of Dreams scenario: if the Troika’s austerity agenda is implemented, Greece will just start prospering under a economic growth will commence. That’s the only plan and it’s a doomed plan which is part of why it’s a hellish situation.
So, at this point, reduced interest payments on Greece’s debt is the only positive thing being dangled out there for Greece. At the same time, as the article below points out, plans for capping the amount of government debt eurozone banks can hold and eliminating the “zero risk” accounting rules for eurozone government debt are apparently proceeding ahead. And as the article also points out, that means a big sell off in eurozone government debt is probably on the way over the next decade. And that means the weaker countries like Greece could end up paying a lot more in interest as banks are forced to dump government bonds that are suddenly declared riskier and worth less than before. So, to put it another way, Greece had better get at least some significant reductions in debt interest rates just to avoid seeing itself in a new debt-death spiral because the eurozone has found a new way to implement its hellish supply-side revolution across the continent: force the public to pay higher interest on government debt:
“Should the eurozone opt for pushing debt relief for Greece into the future it may struggle to get the IMF to get involved in the current bailout. The Washington-based fund says its own rules prevent it from helping the country while its debt is unsustainable. Without relief, Greece’s debt is expected to reach almost 200% of gross domestic product this year.”
That’s the crux of the problem for Greece. High debt and an austerity regime that makes paying it off basically impossible. So the crux of problem is basically usury. And as we saw, as bad as things are for Greece now, the usury schedule isn’t set to peak for another 10 to 15 years and the most the eurozone is offering Greece at this point is a future reduction in interest-rates because they’re concerned any immediate reductions would reduce Greece’s committment to the austerity program:
“But the currency union’s governments remain reluctant to take immediate steps on Greece’s debt—such as giving it more time to repay eurozone loans or prolonging interest-rate holidays—amid doubts over Athens’ willingness to implement further austerity policies.”
Yep, the eurozone is taking a “debt-relief only encourages disobedience” approach. And if Greece behaves for the foreseeable future and implements the insane austerity that’s dooming a generation of Greeks to poverty, the Toika will consider cutting interest-rates and/or extending the repayment schedule.
But even if there’s no escape for Greece, things can obvious get even worse within the the Troikan hell. So let’s hope Greece can at least get the reduced interest-rates set up for when its debt payments peak 10–15 years from now, because it sounds like the new plan to remove the “zero-risk” status of government bonds and cap bank holdings is going to Greece’s public financing, along with the rest of the eurozone’s, a lot more expensive:
“The selloff of government bonds that would be triggered by caps on exposures could be cushioned by the European Central Bank’s asset purchase program, Mr. Dijsselbloem said.”
The ECB is going to be mopping up the government bonds sold off by the eurozone banks. At least that’s the plan, and it’s a plan that could involve playing out for a decade or longer. So it will be interesting to see how this plan for capping government bond purchases by banks and removing “zero risk” policies, which are things Jens Weidmann at the Bundesbank has long been clamoring for, impacts the resistance to the ECB’s QE programs, something Berlin has long opposed. Hmmm....how might Jens Weidmann deal with the prospect of accepting an ECB action he’s opposed in order to achieve a government-shrinking policy he’s championed. Well, he might still oppose it
So it’s looking like the eurozone has a long-term plan to reduce government spending and minimize the “sovereign-banking nexus” by implementing a cap on the amount of government debt banks can hold while simultaneously declaring that debt to be riskier and therefore higher interest. And in order to deal with inevitable sell-off of currently held government debt, the ECB would probably be the chief buyer to cushion the markets. Except this plan relies on the ECB being allowed to carrying out its QE policies for years to come and, of course, Jens Weidmann issued another warning about how the the ECB better now keep buying government bond. And if Weidmann or like-minded eurozone central bankers should manage to derail the ECB’s bond buying over this medium-term time frame, the eurozone debt markets for members like Greece could suddenly get a lot more expensive. And even if things go smoothly, it’s looking like the eurozone has found a new line of attack in its “death by a thousand cuts” war the European public sector.
It is within this context that Greece is being made an offer of more austerity, no debt-relief, but maybe some lower interest rates. But only in the future and after Greece implements all its mandated austerity. So hopefully Greece manages to find some sort of light at the end of the tunnel in these crucial upcoming debt-relief negotiations, but sometimes the light is just the beginning of the well-lit section of the tunnel where you can finally see writing on the wall...“Lasciate ogne speranza, voi ch’intrate.”
Wow. So it turns out the Bundesbank recently requested a bit of a tweak to the eurozone a few weeks ago: The European Stability Mechanism (ESM), the special bailout fund basically run by the eurozone’s Financial Ministers (which means it’s a group the Bundesbank would dominate), should replace the Troika as the financial crisis arbiter for eurozone member states in future crises. The ESM is the new Troika. With enhanced Troika powers because it’s solely calling the shots. Uh oh:
“The Frankfurt-based central bank suggested that the ESM, whose competences are currently largely limited to issuing debt to finance loans to euro-area member states, could take the lead in assessing economic prospects, debt sustainability and financial needs of a country asking for a bailout. Those tasks have so far rested with the so-called troika of European Commission, ECB and International Monetary Fund. The ESM would also oversee any aid program and negotiate between the government and creditors if a restructuring is unavoidable.”
That’s right, the Bundesbank wants constitution control of the purse-strings in the event of a member state financial crisis. What happens during a eurozone-wide crisis isn’t clear but it’s probably not super great. So a month after the Brexit, the Bundesbank just asked for the powers to take Troikan power. OMFG.
Also:
That sounds scary.
What’s next? How about Bundesbank chief Jens Weidmann whining about tweaking the QE:
“If we grant individual countries special conditions or concentrate increasingly on highly-indebted countries than we will blur the lines between monetary policy and fiscal policy somewhat further”
Yes, beware the horrors of the ECB distancing from it’s mandate and blurring the lines between monetary policy and fiscal policy somewhat further by concentrating the QE program on the crisis-ridden countries instead of the current even distribution (that currently benefits Germany the most). But it’s totally a great idea if the ESM gets to become the sole Troika entity in future crises. No pesky Troikan politics to get in the way of raw Ordoliberal malpractice like what the Bundesbank normally advises in a crisis. That’s great. But don’t tweak the QE too much.
The Troika just because the lesser of two evils. That happened. Wow.
The EU’s banking watchdog, the European Banking Authority (EBA), weighed in on how the eurozone should deal with the mountain of non-performing loans (NPLs) that continue to weigh down the crisis-hit eurozone economies: the EBA called for a a eurozone ‘bad bank’, a publicly-funded entity set up to clean up overwhelmed financial sectors in nations where the situation has never gotten good enough to facilitate an offloading of a massive pile of crisis-era bad loans still on the books.
The proposed ‘bad bank’ would buy non-performing loans and attempt to sell them for a period, taking a hit if it eventually can’t find a buyer. It’s basically a financial system bailout mechanism for the eurozone. And here’s the provision required to make it a proposal that might get Berlin’s support: the burden of the cost for buying up these NPLs is explicitly not shared across between nations under the proposal. That’s what can potentially get the austerity-bloc on board. Avoiding turning the eurozone into a transfer union where the wealthy nations subsidize the poor — which is likely necessary — is a key goal of Berlin and other pro-austerity capitals. Each eurozone national central bank will finance its own national program to buy non-performing loans (while everyone ignores how many non-performing loans were due to austerity imposed to pay back foreign creditors).
Keep in mind that the proposal’s non-intra-eurozone-burden-sharing design does nothing to break the potential private bank/sovereign borrowing death spiral that a financial crisis in smaller or weaker member states are especially vulnerable to in the eurozone (in large part a consequence of not having independent banks), but the design does pass political muster. At least that’s what it’s designed to do:
“The EBA’s plan does not envisage the sharing of bank risks among EU states, Enria and Regling said, because if bad loans were not sold and recapitalization were needed, the bill would be footed only by the bank’s creditors and the home state of the lender.”
A nationally-funded, no-burden-sharing eurozone program to deal with a heap a non-performing loans. That’s what the EU’s banking watchdog said is needing to address the ongoing non-performing loans problem in countries like Greece or Ireland. And while the ‘bad bank’ plan may not be optimally designed from an economic standpoint due to a lack of burden-sharing, it’s clearly got a political formula that could work and get Berlin’s approval due to a lack of burden-sharing. Or not:
“It is not clear what the added value of a European bad bank would be,” a German government source told Reuters, adding that NPLs are a problem “only in certain countries”.
Yes, despite the fact that the proposed ‘bad bank’ wasn’t going to involve intra-eurozone burden-sharing, Germany’s government source shot down the idea a ‘bad bank’ anyway by making the point that only some nations have a problem with non-performing loans. That appears to be the argument.
Greece, Cyprus, Italy, Portugal, and Slovenia. Those are the nations with a non-performing loan crisis that just got written off as a triviality. It’s a reminder that the eurozone isn’t just a giant experiment in currency sharing. It’s more specifically an experiment in currency sharing with no burden sharing. And tha means no ‘bad bank’, even a ‘bad bank’ that doesn’t involved burden sharing.
So as we saw, that ‘bad bank’ idea was floated by the EU’s banking watchdog and immediately shot down by Berlin at the end of January. And then ECB floated the same idea a few days later:
“With lenders in Italy and other weaker economies struggling to find buyers for their bad credit, Vitor Constancio called for a European Union “blueprint” for creating asset-management companies (AMC) compliant with EU rules against bailouts.”
It looks like the ECB called for pretty much what the EU’s banking watchdog called for, except with more “flexibility”, presumably in the hopes that there’s some sort of quirky ‘bad bank’ set up that Berlin will agree to (not likely).
And while there’s no indication that Berlin is going to be interested in a ‘bad bank’ proposal any time soon, it’s worth noting that the ratings agency Fitch weighted in on the idea and pointed to three problems with the EU watchdog’s non-burden-sharing ‘bad banks’ proposal: 1. First, EU rules don’t allow it (no burden sharing). 2. Second, German opposition won’t allow it. And 3. the the non-burden-sharing ‘bad bank’ proposals are also going to potentially make weaken the credit ratings of the weakest eurozone members after the public takes on all that non-performing loan debt.
So that’s something else to keep in mind as the eurozone wrestles with setting up a eurozone ‘bad bank’ to deal with present and future debt crises: whether or not the ‘bad bank’ proposal is a good way to deal with something like a non-performing loan crisis, the non-burden-sharing version of the ‘bad bank’ is probably a bad idea:
“Analysts at Fitch admit that hiving off non-performing loans into a bad bad would be “positive for banking systems in countries with large volumes of non-performing loans (NPLs), helping banks to clean up balance sheets and reducing earnings volatility”.”
As Fitch points out, a ‘bad bank’ would of course help clean up overwhelmed financial sectors. But when it’s national ‘bad banks’ and not one big shared ‘bad bank’ you just might end up seeing member states facing a sovereign debt-crisis of their own. Which, you’ll recall, is what happened to Ireland after it bailed out the creditors of its biggest private bank.
So that non-burden-sharing ‘bad bank’ proposal designed to get around German objections that Germany still shot down suggests another stress in store for the eurozone’s austerity-hit nations as the shared currency continues its evolution/devolution journey: there’s a good chance there’s not going to be a ‘bad bank’ for the eurozone. At all. At least not for the current non-performing loan crisis. Those nations like Cyprus or Slovenia or Portugal will have to figure out a different way to address the non-performing loans issue.
Or maybe there will eventually be a eurozone ‘bad bank’ program set up. But even then it’s probably going to be a bunch of separate national ‘bad banks’ instead of one shared bad bank where the wealthy and poorer states pool their resources and share the costs. And without that burden-sharing the cleaning up those non-performing loans in the crisis-hit nations just might trigger a sovereign debt crisis. Or at least lead to a spike in borrowing costs and don’t expect any sympathy from the ECB when that borrowing cost spike happens. Because that’s how the eurozone rolls when it comes to burden-sharing: the options are harmful help or no help at all and it’s not clear which is worse.
Pretty much any crisis these days raises questions about the viability and future of the EU and especially the eurozone. When something goes wrong in a big way in Europe there’s a real questions as to whether or not this will be the crisis that finally causes the whole thing to fall apart. It’s one of the symptoms of many enduring fundamental structural problems still plaguing Europe following the wholly inadequate response to the 2008 financial crisis. And yet all of those underlying fundamental structural problems have at their core an insistence on ensuring the EU isn’t really a union in an meaningful sense. There isn’t actually solidarity. It’s when a crisis breaks out that we learn that the EU is more like an elaborate trade agreement between neighboring rivals. Both in law and in spirit.
Might the COVID-19 global pandemic that has Italy and Spain as the current epicenter bring about a change in that lack of law and spirit? Well, if the current debate of “coronabonds” is any indication of what to expect, no, the coronavirus pandemic will not trigger a counter-pandemic of European solidarity. Quite the opposite it seems.
“Coronabonds” is the term getting thrown around for the bonds that would be issued to finance a eurozone-wide fiscal stimulus effort to counteract that economic shock. In a big break from the prevailing rules, the coronbonds would be jointly financed, so the wealthier countries like Germany would pay the most to finance them while the money would be spent relatively more by the countries like Italy and Spain that need the money the most. This would violate one of the fundamental rules that the wealthier Northern European eurozone member states, led by Germany, have consistently held most dear throughout the eurozone project: that member states not finance each other. The prospect of becoming a “transfer union” like the United States — where wealthier states routinely transfer money to the poorer states — has remained a top fear of the leadership and majority populace of member states like Germany. A great fear than seeing the whole thing unravel. The principle of each state ‘paying its own way’ has been a core principle for the wealthiest member states and that principle is fundamentally anti-solidarity. That anti-solidarity principle also happens to be economically insane and a divorced from the realities of pooling together national currencies and is a big reason each crisis begs the question of whether or not it’s the final eurozone crisis that causes the whole thing to unravel. The anti-solidarity opposition to making the eurozone a “transfer union” dooms the whole project and the coronabond proposal is the latest test to see if anything can overcome that opposition.
So what’s the latest status on the “coronabond” debate? It’s exactly what we should expect: Southern Europe is calling for them and Northern Europe is saying no way. Same as always.
What’s new is that we’re hearing the suggestion that the European Stability Mechanism (ESM) — the eurozone’s bank bailout fund — will get used for the first time. The wholly inadequate ESM that was wholly inadequate by design to avoid the turning the eurozone into a transfer union. That’s where the funding for the coronavirus fiscal response will come. It’s unclear where the money will come from if the ESM is spent and more fiscal support is required. The fund has now swelled up to around 450 billion euros, which is a start but it’s also probably not enough when compared to the unprecedented economic crisis.
Keep in mind that if the ESM gets spent on coronavirus fiscal stimulus and that ends up being inadequate, the eurozone economy still falls apart and the banks are presumably going to require a bailout. That’s how much opposition there is to even flirting with the idea of turning the eurozone into a transfer union: instead of having jointly pooled bonds to deal with the greatest economic emergency in recent memory, the eurozone is spending its inadequate bank bailout fund instead. It’s like they’re trying to implode the thing:
““It is the most difficult moment for the EU since its foundation, and it has to be ready to rise to the challenge,” Spanish Prime Minister Pedro Sanchez said in a televised address Saturday night.”
The most difficult moment for the EU since its foundation. That’s a good way for Spanish Prime Minister Pedro Sanchez to describe it. And it’s extra difficult thanks to the poor job the EU did at addressing its earlier difficult moments, where avoiding meaningful solidarity was made the top priority. Is another difficult moment going to be met with an opposition to solidarity? Well, since Sanchez is warning that the eurozone can’t take another round of harsh austerity in response to a crisis it sure sounds like a lack of solidarity is on the way:
And note, when we hear Austria’s hawkish Finance Minister Gernot Bluemel tell tell the press that, “We should use the existing instruments before we build new constructions that have long-term effects” on European economic stability, that’s Blumel calling for using the ESM. The warnings bout long-term effects on European economic stability is code for alluding to the idea that if the eurozone pools its debt the profligate Southern European layabout spendthrifts will just end up bankrupting Northern Europe. That idea is why there’s no hope for solidarity. Nationalist bigotries. And that’s the primordial fear behind that statement by Austria’s finance minister about long-term effects on European economic stability and why there’s a push to fall back on the ESM instead of coronabonds. The ESM was already set up to allow the eurozone to carrying eurozone-wide bank bailouts without risking turning the place into a transfer union...by limiting the size of the bailout each member state can get. And if a country’s bank bailout needs exceed what’s available for them in ESM they have forced austerity to make up for it. That’s why there’s a call for using the ESM now instead of coronabonds. The ESM was molded in the spirit of no solidarity specifically so they could avoid pooling finances even in the middle of a giant financial crisis:
So it’s looking like the ESM is going to be the one financing any “coronabonds”. And that means all of the various strings that come attached with ESM financing is also going to be in play. Strings like a determining whether or not the eurozone member can finance the new coronavirus debt its taking on and determining whether or not the country needs to impose austerity to make the new coronavirus debt sustainable. When a country taps the ESM any bailout funds funds have to be paid back in 5 to 10 years. It’s a bailout loan that adds to the national debt load. So if a country need to tap the ESM to finance a bailout the ESM assesses that country’s finances and if the finances are in trouble the country has to impose austerity. Yep, that’s how the eurozone’s bailout fund seriously works. Maniacally.
Or, at least in theory. It’s never been used. For obvious reasons. No country wants to use it even if they need it because of those attached strings. But now the eurozone hawks are leaving the ESM as the only option for coronabonds. So we might finally see the ESM in action. Austerity and all:
“Funding from the ESM is tied to conditions, such as structural economic reforms and fiscal belt-tightening. However, all EU governments, including hawks such as Germany and the Netherlands, have acknowledged that an expansionary fiscal policy is now necessary to help companies deal with the liquidity crunch triggered by the viral outbreak.”
“Structural economic reforms” and “fiscal belt-tightening”. Those are the “conditions” for tapping the bailout fund. It’s a bailout fund design to avoid to moral hazard of bailout out states that engaged in irresponsible spending which makes it a bailout fund designed to handle just of the many types of financial and economic crises that can realistically erupt. But that’s the bailout fund the eurozone went with and that’s all they got. Because real pooled coronabonds are off the table. Instead, the joint pooled fiscal stimulus is limited to the EU-level stimulus of ~1% of national GDPs. So basically a joke stimulus:
And that 1% joke EU-level fiscal stimulus is part of the reason there’s so much clamor for real pooled ‘coronabonds’. There’s nothing else. But ESM-backed bonds and all those strings attached remain the only option left available.
And as the following article describes, the ESM has even announced that it’s already conducting debt-sustainability assessments of each eurozone member in case they decide to apply for funds. Because all those funds will have to be paid back and that might be austerity.
But there is one condition that might limit the amount of debt member states need to pay back. It’s not a great provision: the ESM will only provide a credit line to a member state up to about 2% of its GDP for up to 12 months. This is potentially the worst economic crisis in modern history and the ESM is offering paltry credit-lines with austerity strings attached. Which is why Italy and Spain are so hesitant about applying for bailout funds despite being at the current global epicenter of coronavirus deaths:
“The slides, prepared for a teleconference of EU leaders, showed that a credit line — should a government choose to apply for one — could be worth up to 2% of a country’s GDP and be available for 12 months, with a possibility of extending that to up to two years.”
A whole 2% of a country’s GDP for up to 12 months with the possibility of extending it for up to two years. That’s the extend of the coronabond credit-line the ESM is offering eurozone members. And countries like Spain and Italy aren’t getting any extra special treatment despite being extra specially-screwed by COVID-19. It’s part of the pathologically ‘rules based’ approach to evolving the eurozone that makes it more like forced living arrangement than an actual union. And in order to even qualify for that 2% mini-stimulus, the ESM will have to conduct a debt-sustainability assessment because that 2% will have to be paid back. And if debt-levels are deemed to be excessively “structural reforms” (austerity) could be imposed. It really is a bailout fund designed to not be used because the ‘cure’ just makes the bad situation worse:
And now that debt sustainability analysis is underway by the ESM. We’ll see what kind of debt sustainability issues the ESM discovers in the middle of a historic global economic lockdown. But that’s how the eurozone is handling this economic emergency: by falling back on the inadequate ESM bank bailout fund that requires austerity to use. It’s a reminder that austerity really is seen as the cure-all for everything in the eurozone. Including COVID-19 apparently.
Here’s a quick update on the push create jointly financed ‘coronabonds’ to help finance some sort of economic response to the COVID-19 inflicted eurozone economies, especially for Italy. As we already saw, it’s a push strongly backed by the Southern European member states, along with France, and strongly opposed by Germany and the Northern European member states. Instead, the opponents of the coronabonds idea are suggesting that the bailout fund set up to deal with bank bailouts, the European Stability Mechanism (ESM), should be used instead of setting up a whole new joint funding mechanism. The ESM, of course, comes with strings attached. Austerity strings. Any country that signs up for an ESM credit-line is going to be forced to have its debt sustainability assessed (because those ESM funds need to be paid back) and if its debt-level is deemed to be too high it could be forced to impose some sort of austerity by the ESM.
So now we’re hearing from the head of the ESM, Klaus Regling, about his views on the coronabond proposal and whether or not he thinks the ESM could fulfill that role. The way Regling puts it, the eurozone and broader EU have a variety of viable options already available. The ESM could be used as proposed for the eurozone. The European Union could also finance an EU-wide ‘coronabond’ through the European Commission which can raise money against the EU budget. Another option is the European Investment Bank (EIB). All of those options are ready to go now, according to Regling.
Setting up a new jointly funded ‘coronabond’ financing mechanism, however, would take two to three years. That’s how Regling sees it. If if Regling is correct, that means ‘coronabond’ are basically off the table.
Regling also had a rather ominous statement about the prospect of the ESM imposing some sort of austerity on countries like Italy or Spain that would be the obvious states to tap the ESM if that’s the only available option: Regling suggested that, given the circumstances, any conditions for tapping that credit line would be minimal. As Regling puts it, “There should also be a commitment to respect EU surveillance frameworks (but)... it would be no more than that.” So no more than “respecting EU surveillance frameworks” would be expected and yet it’s the EU surveillance framework that imposes the austerity! So if we interpret Regling’s statement with the appropriate level of cynicism (a requirement for eurozone crises), Regling was basically promising that there wouldn’t be any extra austerity. Just the normal “EU surveillance framework” austerity.
So that was the input about coronabonds from the head of the ESM. It sounds like eurozone leaders have given their finance ministers up to April 9th to come up with some sort of financing mechanism. So some time over the next couple of weeks we might have an idea of how the eurozone is planning on making its latest economic disaster worse:
“However, common ‘coronabonds’ could in theory be issued immediately if the bloc’s existing funding institutions were used, European Stability Mechanism (ESM) head Klaus Regling told the Financial Times.”
As we can see, addressing the COVID-19 economic shock with the kind of overwhelming financial firepower the crisis needs and addressing it in a timely manner are mutually exclusive options. At least for the eurozone. If they want to some sort of ‘coronabond’ joint response soon they’re going to have to rely on an institution like the ESM that’s already set up and ready to go. An institution like the ESM that was specifically designed to ensure mandate austerity on member state unfortunate enough to have to use it. And with a proposed 2% national GDP cap for the ESM credit line it won’t be enough to make a difference anyway. A minimal fiscal boost and austerity. That’s what’s awaits countries like Spain and Italy if they have to go down that path.
Now, Regling also suggested possibly raising funds via the European Commission that would draw from the EU budget. But that’s kind of a hard to imagine happening given that Germany’s Ursula Von der Leyen is the current Commission President. At least not a substantial fiscal response.
The proposal of using the European Investment Bank (EIB) is an interesting possibility. The EIB, which was founded in 1958 as one of the first pan-European institutions, plays the role of a financier offer cheap loans for projects that might not otherwise get funding, like infrastructure or climate change related projects. As of 2019 it had around 560 billion euros, which probably isn’t enough to address to the current crisis on its own but is still meaningful. But the EIB is also known for only making very conservative investments with little risk of not being paid back, which raises the question of what kind of terms it might demand in this situation. Loaning to COVID-stricken nations in a time of a global economic emergency isn’t exactly low risk.
And that’s all why it’s looking increasingly like the ESM is going to be the only option offered. It’s clearly the preferred institution of Germany and the other hawks and with just a couple weeks to decide on something it’s hard to imagine there being some sort of breakthrough with one of the other available options. And that’s what makes Regling’s ambiguous assurances about minimal conditions being attached to an ESM credit lines are so ominous: Spain and Italy aren’t being given any other realistic option. And once they submit to that “EU surveillance” that Regling dismisses as minimal it’s just a matter of time before the austerity is demanded. These ESM loans get paid back over a period of years. That EU “surveillance” is presumably going to be in place during that period. That’s a long time for a country to spend in the austerity danger zone:
So like most eurozone crises, the euro-corona-crisis is starting to look extra bad early on. Extra avoidably bad. And this latest opportunity to actually create a meaningful union and go ‘all in’ together with jointly funded pan-eurozone bonds is going to be wasted. Because it would take two to three years to actually hammer out the details. Two to three years that would no doubt be spent ensuring some sort of structure like the ESM that ensure the coronabonds come with so many conditions no member state wants to risk using them.
Of course, given the eurozone’s remarkable ability to make bad situations worse, it’s entirely possible the eurozone is still going to stuck in COVID-induced economic funk two to three years from now. Based on history it would almost be surprising if that wasn’t the case. So whether or not the eurozone ends up going with one of the more expedient options like the ESM, they should probably start getting to work on that ‘coronabond’ option anyway. The coronabonds will be extra necessary two to three years from after all the upcoming avoidable damage is done.
The EU appears to have arrived at some sort of joint coronavirus economic rescue package. And it turns out to be almost as awful as the hawks have been demanding all along and there definitely won’t be any jointly-issued “coronabonds”. At least not now. That negotiation has again been kicked down the road and all of the hawkish members continue to voice their opposition to jointly-issued debt so there’s no indication those ongoing “coronabond” negotiations are going to end well. It’s just going to be a bunch of half-assed half measures and proclamations of “solidarity”. Surprise!
The plan hammered out by the EU leaders includes 100 billion euros to be used for subsidizing wages so that firms can cut hours without layoffs (good, but not enough). Another 200 billion from the European Investment Bank (EIB) would go towards providing cheap lending to companies (recall how the EIB is known for only ultra-conservative lending which would be problematic in this situation). And the European Stability Mechanism (ESM) — the jointly funded bank bailout fund — could make available another 240 billion euros in cheap credit for governments. So it’s around half a trillion euros in total, which is better than nothing but not nearly enough to address the economic collapse. Keep in mind that the ESM caps its credit line at 2% of the GDP of a member state so even if a country does tap it that probably won’t be enough to really make a difference in terms of financing a fiscal stimulus program to pull out of this sudden economic chasm. Japan, for example, just unveiled a stimulus program that’s at about 20% of Japan’s GDP. The ESM credit line is capped at a tenth of that and that’s set up to be the the main source of emergency spending funding for COVID-hit member states.
But if a country does end up tapping the ESM anyway, what about the fears that that tapping the ESM credit line would come with “conditions” (austerity) for the countries unfortunate enough to be forced into that situation? Well, that’s where the big concession from the hawks took place. The Netherlands had been demanding that any countries tapping the ESM need to have “economic conditions” (austerity) imposed. Angela Merkel apparently convinced the Netherlands to back down from that demand. As long as the ESM credit is used for medical needs there won’t be any austerity. But austerity can still be imposed if a country uses the ESM for other reasons like stimulating its economy (yes, austerity for countries that need to borrow to stimulate their economies...that’s how the EU works). That was the big concession by the hawks that’s being touted by EU leaders. No austerity for money borrowed to keep people alive (but austerity for anything else). Behold the grand solidarity:
“The package would bring the EU’s total fiscal response to the epidemic to 3.2 trillion euros ($3.5 trillion), the biggest in the world.”
3.2 trillion euros in total, the biggest coronavirus response package in the world. That’s about the most positive spin you could put on it. In reality, of that 3.2 trillion euros, 2.2 trillion of it is from the ECB for shoring up credit markets and another 417 billion was the discretionary fiscal measures of EU governments on their own. Discretionary fiscal measures that the hawks feel should incur an austerity penalty. The new half a trillion euro package that just got announced is the extent of the pan-EU response. As we should expect, the ECB is the only European institution acting in a many that remotely resembles European solidarity, and that’s over the wishes of the ECB’s hawks. Hawks who almost always win out when it comes to pan-EU decisions outside of the ECB’s domain which is exactly what happened in this case. It has long been projected that the only way the eurozone could end up issuing joint debt is if there’s some sort of unprecedented crisis that threatens the entire to collapse the entire thing. Well, we’re right in the middle of that unprecedented mega-crisis and the hawks continued to win out on their refusal to jointly issue debt. Even joint debt just for this crisis. That remains verboten:
Instead, it was a mere half a trillion euros in mostly credit. 100 billion to support wages, 200 billion in credit for business, and 240 billion in credit from the ESM that’s going to be capped at 2% of GDP for a member state:
And as the following article points it, if any of that ESM credit line is spent on anything other than medical needs, it’s going to make that country subject to austerity ‘conditions’. So if a country makes its economy extra depressed by shutting down its economy to keep people health and it ends up needing to tap the ESM to finance a stimulus program to pull itself out of that economic pit it’s going to have to impose more austerity:
“EU finance ministers on a video conference call struck a deal late on Thursday after the Netherlands shifted on a demand for “economic surveillance” of countries benefiting from €240bn of credit lines via the European stability mechanism, a bailout fund for struggling member states.”
“Economic surveillance”. That was what the Netherlands had been demanding as a condition for any country that taps the ESM’s 240 billion during this emergency. And “economic surveillance” is, of course, code for an austerity regime. Some sort of “troika” could get set up for Italy or Spain and find all the government programs and pensions they think should be cut and the nightmare of austerity-induced economic shocks in the middle of a downtown can be repeated. Although this time the “troika” would include the ESM instead of the IMF, which would probably make it an even more ruthless troika than before. It’s one of the dark ironies of the eurozone crisis that the IMF was, relatively speaking, a moderating voice on the troika. It was still nuts and supportive of egregious austerity policies but still relatively moderating compared to the European Commission. A troika triggered by the ESM would consist of the ESM leadership in place of the IMF. That could be perilous for a member state to be subjected to which is why no one has used the ESM so far. The ESM Was designed to be so painful no member state will use it unless they have no choice.
And thanks to COVID-19, a number of EU members might end up with no choice. They’re going to have to tap the ESM because they won’t have any other option for emergency spending by the government. The ESM is the only option given for that. The issue of jointly-issued “coronabonds” remains officially unresolved. The leaders from Italy and Spain are even making pronouncement about how coronabonds might come in the future. But as we can see, the bloc of hawks (Germany, Austria, Finland, and the Netherlands), haven’t moved at all on that issue:
And if there aren’t going to be coronabonds in the future, that makes tapping the ESM unavoidable. But according to the Dutch finance minister, there are conditions for the ESM. That’s part of what they just agreed to. The conditions are only waived if the ESM credit line is spent on medical expenses. ESM credit will be available for “economic support, but with conditions”. Which basically means there won’t be an credit available for economic support because no member state is going to want to take the money for stimulating its economy if it comes with the cost of “economic surveillance” that will undo any value of the stimulus:
So EU member states heavily hit by COVID-19 basically aren’t getting any sort of meaningful economic stimulus credit line. There’s a credit line for that, but you don’t want to use it for anything other than medical expenses. Medical expenses are the only non-penalized form of economic stimulus under this bailout package. A bailout package that includes the promise of future talks over coronabonds that the hawks continue to promise to not support in those future talks. Solidarity in the EU comes in the form of the promise of future failed talks. There will be talks. Talks about fundamental issues about the structural fairness of the European project like joint debt issuance. Those future talks will happen in the spirit of solidarity. And that’s pretty much the extent of the solidarity. A pledge to keep holding future failed talks where joint debt issuance is decried by the hawks as way too much solidarity that they will always completely oppose.
Here’s a pair of articles that point to two of the dynamics that have emerged from the coronavirus crisis and the fight over whether or how the EU and eurozone should tackle the enormous economic shock of the COVID lockdown that relate to the broader eurozone systemic crises that have plagued Europe ever since the financial crisis and subsequent debt crises:
The first article is a Bloomberg piece about a suggestion by EU Commission President Urusla von der Leyen about how the EU should jointly tackle the coronavirus crisis that touches on the fight over whether jointly-issued “eurobonds” should be issued to finance the coronavirus response. As we’ve seen, the results of that debate were a series of half-measures that didn’t involve jointly-issued debt and pledge to revisit the coronabond topic during later talks. President von der Leyen’s proposal is sort of an extension of those coronavirus talks. Sort of.
She proposed that the European budget should be the “Mothership” of the EU’s coronavirus response and that an increased EU Commission budget should be how much of that joint response in channeled. Because the EU budget is a joint budget that is paid into by each member state according to the size of their GDP but potentially spent according to the needs of each member state. That makes it one of the few aspects of the EU that really jointly financed. In that sense, the EU budget is kind of like a coronabond.
This was a significant proposal in part because it represented a potential compromise from Germany on the coronabond issue (Von der Leyen was Germany’s Defense Minister before taking this job). But more fundamentally, it represented a potentially significant step in the evolution of the EU because one of the key features of the EU is how relatively small the EU Commission’s budget it relative to the size of the EU economy. The EU budget is analogous to the US federal budget in terms of the role it plays as the union’s joint federal budget but it’s tiny compared to the US federal budget. That is, of course, by design precisely because the EU budget represent that which the hawkish member state hate the most: a transfer union that automatically transfers money from the wealthier member states to the poorer member states. Keep that budget small keeps those rich-to-poor transfers small.
As the article notes, the EU budget is so small it’s going to be dwarfed by the size of a reasonable coronavirus response package cost. The EU budget is a mere 1 trillion euros spread over seven years. That’s like 160 billion euros a year. The US federal budget in 2019 was $4.45 trillion and Europe’s federal coronavirus fiscal response alone should cost well over $2 trillion. So proposing to make the EU budget the “Mothership” is a potentially historic moment in the evolution of the EU in terms of the size and importance of EU-level jointly financed spending. If a meaningful coronavirus response really is financed primarily through an EU budget “mothership” that could double or more the EU budget. At least temporarily. But potentially a long temporary time that extends for years.
On the other hand, there’s the obvious possibility that channeling the coronvirus spending through the EU budget is just another way of keeping it small and inadequate. That way there is some jointly financed spending. Just not nearly enough, which is how the hawks want it. That kind of scenario is entirely possible and, based on history, probably what we should expect:
“An expanded budget should be “the mothership” of efforts to revive growth after the coronavirus pandemic, European Commission president Ursula von der Leyen told EU lawmakers in Brussels on Thursday. The bloc’s leaders will have a “strategic discussion” about the spending plan during a conference call next week, said European Council President, Charles Michel, who leads their meetings.”
An expanded EU budget that’s the mothership of the EU’s pandemic response. That could be the “coronabond” compromise: The EU budget has the key feature the coronabond advocates are looking for in being jointly financed but issued based on need. It’s how the EU, and especially the eurozone, really should operate but the wealthy hawk members led by Germany have continued to voice their complete opposition to joint debt issuance even in the face of the pandemic. That’s precisely the message that was voiced by multiple hawkish government officials when the last underwhelming coronavirus package was announced: joint debt issuance remained completely off the table for a number of governments. And eurogroup decisions have to be unanimous so a single hawk member can block something and all the hawks appears to be completely opposed to coronabonds no matter what. That leaves the EU budget as really the only other realistic option for a jointly financed coronavirus response. And it’s an option that pushes EU-level spending in the direction it’s long needed to go in terms of the size of the EU budget relative to the size of the broader EU economy. So this proposal of an expanded EU budget offers the hawks a potential compromise on the issue of a jointly financed coronavirus response and meaningful solidarity. But doing so would come at the risk of expanding the EU budget which is something the hawks will want to avoid as a general principle. The EU budget is small because the hawkish nations want it small because it’s jointly financed:
Using the common budget may be more palatable for the rich north, but it’s definitely unclear whether it would satisfy Italy and the other southern countries that have been hardest hit by the virus because it remains entirely unclear if an expanded EU budget would be expanded enough. It’s entirely possible we’re looking at a gambit by the hawks to use the EU budget as a jointly financed substitute for coronabonds that only spends a paltry amount compared to what’s required. The entire EU budget right now, 1 trillion euros spread over seven years, is a pittance compared to the trillions of euros realistically needed for a coronavirus fiscal response. And increasing EU budget spending is historically a huge issue because of the hawks. So the idea that the EU budget will be able to expand enough to finance a realistic response to the pandemic seems rather unrealistic in the context of the unyielding posture by the EU hawks that has been held from the start of the financial crisis in 2008. Jointly financed spending is one of those red lines the hawks have refused to allow to be crossed no matter how deep the various EU and eurozone crises got and holding the EU budget down to a minimum is part of holding that line. A dramatic expansion of the EU budget really would represent a significant crossing of that hawkish joint finance red line:
And keep in mind that when President von der Leyen referenced the 3 trillion euros that have already been committed, recall that 2.2 trillion euros of that 3.2 trillion where the ECB’s QE bond buying. And a large part of the remaining trillion in spending was the money already being spent independently by member states. In other words, there still has basically be no meaningful response to the pandemic at the EU level outside of the ECB’s intervention in the bond markets:
But there’s a eurogroup meeting of eurozone finance ministers coming up on April 23, so we’ll get a sense of how the hawks will treat von der Leyen’s proposal:
Now let’s turn to a piece in MarketWatch about French President Emmanuel Macron’s call for joint financing of a collective corona response. He declared that Europe needs another 400 billion euros in EU level coronavirus response. And that’s certainly a step in the right direction, just not nearly enough. But it’s more than the hawks want to give.
The piece notes that the EU is set up around unanimous decision-making. So a single nation can block something new like coronabonds which is why the proposal of using the EU budget is so tantalizing and why Macron needs to make his case in the hopes of winning over Germany and the rest of the hawks. This is one of those unanimous decision battles that invariably involves creating a giant deal everyone kind of likes and kind of hates and doesn’t work because the hawks are ideologically insane.
Macron’s call for a big jointly financed coronavirus response included a warning that a lack of meaningful EU solidarity during a crisis like the coronavirus will only fuel the far right in the countries hardest hit by the virus. And then the piece ends with the point the flip side is also true: if some sort of joint financing is in the end agreed to, that’s only going to fuel the far right politically in the hawkish nations where the public broadly opposes joint financing (e.g. Germany, the Netherlands, Finland, Austria). The far right champions the hawkish pro-austerity policies and attempts to lead the revolt against the consequences:
“The French president has a point in noting that if Europe cannot show its citizens that it is there when they need it, populists in the south of Europe will gain ground — and that is also true of France, where Macron will face a far-right challenge if he runs for reelection in 2022. But he also forgot to mention the other populists — in the Netherlands or Germany, where far-right parties can be expected to campaign against the very idea of pooling European resources to help the countries who need them most.”
It’s one of the features of the EU: the crypto-far right domination of the federal level of the EU ensures policies that will create havoc in countries like Spain and Italy and the local far right parties get to reap the political benefits with the anti-EU stances. That far right has its bases covered. And if things get so bad there just has to be a collective jointly financed response to hold the thing together and even the German government and the rest of the hawks agree to it, that could end up turbo-charging the far right ‘populists’ in the hawkish states. That’s part of how the EU operates. The far right always wins. Somewhere. It’s a problem. There’s an establishment EU far right that represents the ‘center right’ component of EU politics like the CDU and then there’s the ‘anti-establishment’ and ‘populist’ far right in countries like Italy that are damaged by the ‘center right’ crypto-far right policies. And they do their dance of grievances. And at the crux of it is an adamant opposition to jointly financing spending and turning the EU into a more US-style transfer union where wealthy states systematically transfer wealth to the poorer states:
So as we can see, the battle lines in the EU fight over a joint coronavirus response appears to be around fights over proposals like Macron’s extra 400 billion euros in EU-level spending (good but not enough) and Ursula von der Leyen’s vague and undefined proposal to turn the EU budget into the “mothership” for a joint response. Which suggests we’re looking at maybe a 400 billion euro EU-level response that the hawks agree to and that’s it. No more. 300 billion euros is more likely. If that. Which is about as good as it gets for EU policy. Good enough to hold things together but not good enough to fix the problem. That’s how things usually work so that’s probably what we should expect. Better than nothing but not good enough. Maybe. If we’re lucky. That’s the status of the EU level joint coronvirus response so far: it’ll be significant if we’re lucky.