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IEP Lunch Debate with Jörg Asmussen

The lecture “The European Central Bank, the banking union and the stabil­i­sation of the euro zone” by Jörg Asmussen, then member of the ECB Executive Board and former state secretary in the Federal Ministry of Finance, on 4 November 2013, focused on the require­ments of a future banking union in conjunction with a fiscal union.

According to Asmussen, the crisis that Europe is currently under­going has highlighted the lack of a compre­hensive European approach. The path to a common financial market policy with a banking union is mapped out and necessary. Regarding the lessons, Europe can take the U.S. as example, where there exists a private alongside a public banking union. In the U.S., challenges in the banking sector are not treated at member state level as in Europe but rather, thanks to federal struc­tures, by the Federal Deposit Insurance Corpo­ration (FDIC). Asmussen raised the question how the federal state of New York’s financial situation might look today if it would have had to raise the guarantees and payments to save, for instance, Citibank on its own. How would the market have reacted and rated the credit­wor­thiness of the bank as well as the state? Therefore, struc­tures similar to those in the U.S. should be estab­lished in Europe. A European banking union could also help to pass on the ECB’s low interest rates to the member states that need them, thus having a positive effect on the euro and the internal market.

A banking union, Asmussen explained, consists of two essential elements: a common mechanism to supervise banks and a common mechanism to resolve banks. The former will be fully opera­tional in the autumn of 2014 with the SSM (Single Super­visory Mechanism). Since the reputation risk of the SSM is with the ECB, the ECB is scruti­nizing the banks’ books very thoroughly. Unfor­tu­nately, the previous stress tests have not led to new trust in the European banking sector; the third and last stress test, whose results will be published in autumn 2014, must help remove the existing uncertainties.

The second indis­pensable element of a banking union is set to enter into force in 2015 with the Single Resolution Mechanism (CSRM). With this mechanism, banks in the internal market are to be resolved across borders and without causing shock waves in the financial market. This could minimize the possible risks for the tax payer. The crisis and partic­u­larly the measures to save Hypo Real Estate have shown that coordi­nation between the member states is not suffi­cient. A resolution requires three elements:

Alongside the public banking union there is also a private banking union in the U.S., which encom­passes banks and capital markets. According to scien­tific studies, this private banking union was able to absorb two thirds of all external shocks. Furthermore, banks in the U.S. do not limit themselves to individual federal states but rather operate across borders, while many European banks focus their activ­ities above all on their respective home states. The European capital markets are not integrated either. In France and Germany, for instance, 85% of share capital is held nationally. Conse­quently, there is no absorption in case of national imbal­ances. By contrast, transna­tional activ­ities could lead to a diver­si­fi­cation of risk and strongly integrated financial markets could help with the resolution of banks. Asmussen also raised the question whether an EU budget or even a euro zone budget could help to absorb business cycle fluctu­a­tions. Although the absorption provided by national budgets is suffi­cient in normal times, it is insuf­fi­cient in times of crisis, as the example of Ireland has shown. Regarding the future resolution mechanism, Asmussen empha­sized that, thereby, the costs are distributed among the banks’ creditors and owners, the need for rescue by national budgets lowered and thus the taxpayers’ money spared. The banking union, therefore, can contribute to a stabi­lization of the financial union. Furthermore, analogous to the U.S., where the Treasury extends a permanent credit line to the FDIC, the ESM could provide the means for a resolution fund. This would require changing the ESM-Treaty but not revising the EU-Treaties. Finally, Asmussen advocated harmo­nizing tax regimes in Europe. Since enter­prises are migrating to other European countries in order to maximize their net profit, there must be, for instance, a minimum corporate tax rate across Europe.

In summary, Asmussen under­lined the necessity of creating of a banking union. Such a union reduces the need of stabi­lization at EU level and is in the interest of the EU as well as Germany. The necessary decisions must be reached as soon as possible so that a European resolution mechanism is opera­tional alongside the Single Super­visory Mechanism (SSM). A banking union is open for other states beyond the euro zone. However, states such as Great Britain that do not wish to further integrate should not obstruct willing states.

By Jéronimo Barbin