Will Germany Allow the European Commission as Banking Authority?

As illiquid European banks continue to present problems in the EU, leaders are now contemplating the potential of creating authority for the European Commission or the European Stability Mechanism to wind down faltering banks. While Germany continues to be the key variable in the bailouts of banks, the EU has slowed progress towards creating a banking union due to previous German disinterest.

If measures were taken to allow the EC or the ESM to handle failing banks, existing EU treaties would be able to remain unchanged, which could be appealing to Germany as they look to avoid being further financially obligated for euro zone banks. Moreover, this situation presents an alternative to help avoid the banking union which Germany opposes.

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The president of the EU’s finance ministers, Jeroen Dijsselbloem warns of delaying a banking union further at a time when member banks are to be checked for asset quality in the coming months. Should the results be troubling, and without a cohesive infrastructure in place to deal with them, these banks could pose further threats to the EU’s current economic situation.

Wolfgang Schäuble, Germany’s finance minister, has previously accepted the fact that a banking union could occur, but remains concerned about the role his country’s money would play in such a set-up. As a result, he has called for a more methodical approach to setting up the union, while others still see the need for haste.

Specifically, Mr. Schäuble fears that unless some sort of “network” for liability is set up, Germany will continue to be on the hook for banks, stating, “[If] we mutualize liability without fully mutualizing the decision-making power, we create the wrong incentive again. Therefore we’ll have to get by with a network in the first stage, or focus on a network, as long as we haven’t created further institutional improvements.”

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With the most recent bailout of Cyprus occurring a few weeks ago, and with German Chancellor Angela Merkel’s reelection approaching in September, support from the EU’s most successful economy for any further banking arrangements will continue be met tepidly. Germany was the last to approve the bailout for troubled Cyprus, and showed its muscle over the financial direction of the EU in doing so. Strict demands were made on the small island, including pension cuts and welfare reform. In working towards an equitable solution towards troubled banks, Germany will likely continue to make sure its influence is felt throughout the process.

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