Today’s big news is that the eurozone has finally agreed to a banking union, and all of Europe’s problems are solved again.
People are finally catching on to the endless announcements without substance that have characterized the eurozone’s crisis fighting efforts. Yesterday, I wrote that Germany and France were clashing over the banking union as head of their respective coalitions.
Germany neither wishes to be on the hook for periphery banks nor subject its own sketchy institutions to a regulator that it cannot control.
France is in much worse financial shape than is being reported. It’s banks are overleveraged and its budget situation is worse than Italy’s. The French know that they could be the next domino to fall, which is why they are pushing so hard for this banking union.
Even though nothing of substance has been negotiated, you cannot have a summit without a press release pointing to its accomplishments and pictures of smiling ministers. They announced an agreement without much substance, so that each country could spin it however it wished to its domestic media.
They are claiming that the banking union will come into force by the end of the year. It won’t have money, a staff or even a set of rules by this time.
Hollande says that the banking union will be fully operational in 2013 and be able to disburse funds from the ESM sometime in the first quarter, and these funds will be able to decrease the sovereign liability for Greece, Spain and Ireland for their bank bailouts. Merkel is actually looking towards 2014. In picking one these conflicting time frames, remember the golden rule: He who has the gold makes the rules.
The reality is that there is simply not enough money in the ESM to bailout Spain and its banks. The Germans know this and hesitate to allow countries’ existing liabilities to be paid by the ESM through a banking union. They oppose this action and continue to delay.
Germany has also rejected a joint liability for deposits. A banking union without a depository insurance scheme is unworkable. Then again, a currency union without a fiscal union is unworkable, and this fact has not stopped anybody.
This latest summit is a repeat of June’s. A vague, toothless agreement has been released for general consumption to mollify markets and political factions. Nothing actually has been agreed to.
The northern tier backed away from the June agreement just last month and have yet to commit to concrete steps that will lead to a banking union. These are
- A joint depository insurance scheme
- The type of institution to be regulated
- A set of rules
- An implementation schedule
- A way to legally allow countries outside the eurozone to participate in an ECB-led banking union
- A plan to deal with banks that are already in trouble or have been bailed out.
The northern tier has made agreements at these summits but balks when it becomes time to implement them or pay for them. If you do not see each and every one of these six points addressed and paid for in any statement or announcement, then you do not have a banking union.
This dance falls into the pattern that we have witnessed since the start of the crisis. The eurozone remains on edge because of brinkmanship politics. Germany will do just enough to maintain the status quo but not enough to help periphery. It refuses to commit a long-term solution that will be expensive but actually solve the problems confronting the common currency.
If the northern tier wants the euro and polling shows that its citizens do, then the politicians will have to be honest with the costs of saving it. So far, Merkel has not been truthful with the voters. Saving the euro will be quite expensive. The periphery needs to be bailed out and all the schemes proposed to do this require lots of money and guarantees.
The media has been no help in telling the true story, either. They use euphemisms like “cash injections,” “pumping capital,” and “firing a big bazooka” among others. These terms all mean the same thing: Throwing the northern tier’s taxpayer cash at the periphery’s problems.
Eventually there will be a severe shock, and then it will come time to ask the electorate to make huge sacrifices to save the euro. These requests will require large amounts of political capital and trust. Withholding the truth from the electorate neither builds this capital nor engenders trust, and then the politicians’ please will fall on angry ears. What will the eurozone do then?