Divisions hinder fix broken banks

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Eurozone countries unable to reach an agreement on the banking union and its conditions. While France defends establishing the European Stability Mechanism, Germany rejects any ESM involvement

 

The eurozone wrestled on Oct. 14 with the question of who should pay for a clean-up of bust banks, as Franco-German divisions cast a cloud over efforts to seal a landmark reform and draw a line under the region’s financial crisis.

As Spain and Ireland prepare to end their reliance on international aid that shored up their banks, finance ministers sought to devise a long-term action plan to deal with problems likely to be uncovered in bank health checks next year.

Issues remained over how much the eurozone’s rescue fund, the European Stability Mechanism, will be able to help, as well as over how to build a single banking framework for the bloc and resolve future problems together in a banking union. “It is a priority, an essential project,” France’s Finance Minister Pierre Moscovici told reporters after the meeting in Luxembourg. “A weak banking union is not a banking union.”

France is leading a group including Spain and Italy in demanding that the ESM, established to provide financial help to eurozone governments, act as a clear backstop for unstable banks in the euro area, in time for when the European Central Bank’s health test results are announced some time in 2014.

Germany, Europe’s largest economy, along with the Netherlands and Finland want conditions attached to any ESM involvement to prevent the clean-up costs being foisted on them.

France defends ESB

“France defends the possibility of using the European Stability Mechanism as a backstop within the banking union,” Moscovici said.

Bank health checks by the European Central Bank are a critical step in establishing a single banking framework for the eurozone, giving credibility to ECB supervision and paving the way for the bloc to cooperate on saving failing banks.

The divisions in the 17-nation currency area were underlined by Moscovici’s blunt criticism of Germany before the meeting.

In a new book to be published this week, he accused Berlin of holding up progress on banking union to protect its own ‘strange’ financial system of regional banks that are “deeply intertwined … with local political circles”. “What Germany fears … is … a loss of political control over its banks, which means in the final analysis a loss of sovereignty,” Moscovici wrote in “Battles to resurrect France”.

Germany’s finance minister, Wolfgang Schaeuble, was not present because of talks to form a new German government.

To complicate matters further, Britain, which is outside the eurozone, has repeatedly refused to sign off on the first pillar of banking union, the supervision. London has demanded assurances that Britain will not face interference from the ECB-led banking union.

The acrimony between the eurozone’s two largest economies, France and Germany, will complicate EU efforts to strike a deal by December on how to salvage failed banks, as set out by Europe’s leaders to give time for the agreement to be signed into EU law in 2014.

A failure to do so would put the ECB out on a limb when it begins supervision of eurozone banks late next year, without any means to shut or save banks in trouble.

 

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