Brexit Fallout Hits Referendum Talks Around Europe

(Bloomberg) -- As the world watches Britain deal with the fallout of putting its EU membership to a popular vote, other countries are rethinking the concept of the referendum.

In Denmark, which joined the European Union the same year as Britain almost half a century ago, parliament is debating the idea of holding a plebiscite on the question of banking union. Doing so would require asking voters to decide on issues such as who should wind down a failing bank and how.

Initially, it had looked like a majority in the Danish parliament might back a referendum. But now, lawmakers appear to be cooling to the idea.

“There’s a general feeling that it’s not a good idea to risk a popular vote, especially on such a complicated and technical issue as this,” said Marlene Wind, a professor at the Center for European Politics at the University of Copenhagen.

A decision now looks like it will be put on hold until a government-commissioned report on the banking union is published later this year. That also means the issue won’t be addressed before general elections, due to be held by mid-June. The opposition Social Democrats are leading in most polls, and look set to win power after the summer.

Referendums Can Go Very Wrong

“The Social Democrats know that it’s not such a good idea to hold another referendum because, as you can see in the U.K., referendums can go very wrong,” Wind said. The Social Democrats “used to argue that we need to ask the people. But they’ve gotten cold feet because they realized they will soon be in government.”

The main groups now backing a referendum are the Danish People’s Party, an anti-EU faction whose main agenda is to curb immigration, and the Red-Green Alliance, a far-left party that is also skeptical toward the EU.

Since the banking union was created in response to Europe’s debt crisis, Denmark has voiced skepticism. The Danes, who voted to join the EU but stay outside the euro, are worried that being in the banking union would force them to make changes to their mortgage market, more specifically, to the funding model that underpins their home loans.

Losing a Non-Euro Ally

Interestingly, Britain’s decision to leave the EU might also play a role in Denmark’s views on banking union. Should the U.K. go through with its exit, Denmark would be left without a key ally among non-euro states, according to Steen Lohmann Poulsen, deputy permanent secretary for financial affairs in the Business Ministry.

Denmark’s central bank and Prime Minister Lars Lokke Rasmussen have voiced support for joining the banking union, arguing that it’s better to have a seat at the table. Some politicians have also pointed to the money laundering crisis that’s engulfing Danske Bank A/S as another reason to join, even though the European banking union provides only limited tools for tackling such issues.

Brexit Fallout Hits Referendum Talks Around Europe

Bail-Out Aversions

Inside the Nordic and Baltic regions, which are closely linked through their banking systems, views on the banking union differ widely. Finland and the Baltic states are all members. Sweden and Denmark have both said they’ll revisit the question of membership later this year. Norway is outside the EU, but will be affected by any decisions its Nordic neighbors make.

A key concern about joining among northern European countries has been that they’ll be called on to bail out ailing southern European banks. But Poulsen says the evidence so far suggests that fear might be unfounded.

“So far they have proved that yes, it works, and no, we should not pay,” he said.

Non-performing loan levels in the south remain a concern, Poulsen says. “They have come down, but they are still pretty high, and obviously something needs to be done with those legacy assets.”

Almost half of all loans in Greece are considered to be non-performing, according to a new Swedish central bank study. Meanwhile, provisioning for the soured loans lags behind the European average. The picture is only somewhat better in Cyprus, Portugal and Italy.

Meanwhile, at a recent meeting of supervisory heads in Stockholm, a consensus appeared to emerge around the notion that Sweden and Denmark should look into joining the banking union at the same time. Such coordination would be almost impossible to achieve if the matter were left to a plebiscite.

The complexity of the issues at stake suggests the question of banking union membership isn’t one that should be left to a referendum, according to economists.

“Such matters should be decided by parliament,” said Helge Pedersen, chief economist at Nordea Bank in Copenhagen. “That’s why we have a representative democracy.”

©2019 Bloomberg L.P.