(Bloomberg Opinion) -- Olaf Scholz’s announcement that he’s ready to make progress on a European “banking union” is eye-catching. Germany has been the biggest block on this vital project, dragging its feet over a “common deposit guarantee scheme” that would ensure equal protection to all small savers across the euro zone. That the country’s finance minister is now open to the idea is welcome.
A look at the fine print should temper any optimism, though. Germany has always hinted at the possibility of some form of deposit insurance, just not before countries in the monetary union reduced the risk in their banking systems from sovereign bonds and non-performing loans. These red lines are still there in Scholz’s proposal. There are a few new ones too, for example on corporate tax.
The banking union project was a reaction to Europe’s sovereign debt crisis in the early 2010s, which showed the dangers of keeping financial supervision and crisis management at the national level. The euro zone has shifted supervisory powers to the European Central Bank, and created the Single Resolution Mechanism, which uses a common rule book to handle the troubles of large banks.
There are still many holes in this process. For example, small and medium-sized banks are often still dealt with domestically, and critics fear the SRM doesn’t have the firepower to deal with a systemic crisis. The glaring omission, however, is the lack of a single deposit guarantee scheme across the bloc. The bill for rescuing savers with deposits of up to 100,000 euros after a bank failure still sits with individual states. For a monetary union, this creates an unacceptable disparity between European citizens.
To overcome this problem, Scholz has proposed (in a column in the Financial Times) a new mechanism of “reinsurance.” National deposit guarantees would remain the first line of defense, but member states would be able to borrow from a European deposit insurance fund to cover extra losses. Scholz believes these loans could become outright transfers, but only over time. In any case, he’s clear that the final backstop should remain national. “Where additional financing may be necessary, the relevant member state would step in,” he writes.
Such a proposal is less ambitious than what is needed for the euro zone. It preserves fragmentation and doesn’t eliminate the asymmetry between savers in different countries. It’s also unclear whether Scholz — a Social Democrat — is speaking in a personal capacity, or has the backing of Angela Merkel’s Christian Democratic Union.
After years in which the banking union appeared dead because of Berlin’s hostility, it’s obviously better that a finance minister seems prepared to negotiate. Once a reinsurance scheme is in place, it may evolve into something more meaningful.
But there are many conditions attached to Scholz’s plan. These include the need for euro zone members to make progress on a common corporate tax base and a minimum effective tax rate, which is opposed by low-tax countries. There’s also a requirement for harmonizing national insolvency laws, which is intrinsically complex. He also wants to change the regulatory treatment of sovereign bonds so they’re no longer risk-free, which is opposed by high-debt states such as Italy.
It’s hard to argue with most of these suggestions. It’s only right to encourage banks to diversify their holdings of sovereign bonds to limit their exposure to their domestic government. A European insolvency regime would help ensure that the failure of small and medium-sized lenders didn’t follow ad hoc national rules, as happened in Italy in 2017. But there’s no reason why the euro zone cannot make progress on a joint deposit scheme before these problems are resolved. Germany, whose banking system is riddled with problems — at Deutsche Bank AG, notably — could benefit too.
Scholz’s move will only be meaningful if euro zone countries abandon their vetoes and engage in meaningful talks on accelerating the banking union. The European Commission has put together a highly unambitious roadmap on the creation of a common deposit insurance, which could do with a refresh. The ECB has given its blessing to the idea. The missing ingredient has been political will. One hopes this time is different.
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net
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Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.
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