The last week’s Summit backtracked on the main goal agreed in June: decoupling banking rescue from sovereign debt. The euro was then at the brink of collapse, Spain and Italy receiving a relentless pounding by markets. Now that survival seems ensured, Germany is anxious to trim down the budgetary cost such a decoupling might entail. Don’t expect the EU paymaster keeping its promises when it comes to footing the bill.
An irritated Hollande openly clashed with Merkel, bitterly denouncing her stubborn resistance to a swift implementation of the banking union. But the damaging tug-of-war between the main euro zone partners was finally defused thanks to Draghi’s recognition it would take several months for the European Central Bank putting in place the new scheme. Thus France was able to claim victory, even if it sounds a Pyrrhic one, by securing the end of this year as a deadline for the legal framework governing single supervision.
Ms Merkel reaped more substantial gains, though. To begin with, the effective set up of single supervision is to be delayed until the second half of 2013 when general elections are due to be held in Germany. Resisting pressures for early implementation strikes the kind of message voters are likely to appreciate.
It also seems fully warranted to allow the ECB a sensible time span for tackling the formidable task it will be confronted with. Scrutinising more than 6,000 entities across Europe, with hardly any experience at the job, looks a highly demanding challenge. The more so as sensitive governance issues will emerge when covering non-euro banks to avoid competitive distortions within the single market.
The German Chancellor scored a further success by depriving European Stability Mechanism direct recapitalisation of any substantive meaning. She publicly expressed her flat refusal to take on board legacy liabilities stemming from restructuring undertaken before the single supervision is effectively in place.
Spain and Ireland lose all hope of transferring their burden to the rescue fund. It was a predictable outcome. You can hardly pretend restructuring and supporting troubled banks the way you like, hoping others will bear the onus. You cannot seriously envisage the ESM to blindly underwrite any potential loss, regardless of the cost sharing conditions creditors, in particular the subordinated ones, are offered.
To avoid this from happening Finance ministers are called to set the rules for future ESM involvement in direct recapitalisation. Losses are likely to be limited in scope as the funding mechanism for liquidation of troubled entities will be financed by the industry under the foreseen scheme.
Ms Merkel also won a number of ancillary, yet non-negligible issues back at home. Even if the ECB is handed over ultimate control over supervision, national regulators will retain the upper hand in non-systemic banks, thus shielding German regional saving banks from intrusive exposure.
The idea to pool deposit guarantee funds is definitely shelved, thus avoiding mutualising a potential budgetary risk. A vague reference to harmonisation stands as the only commitment in this key issue for Germany.
Some observers consider the match between Merkel and Hollande ended up in a draw. Yet, if you put on a balance the winning points each of them scored it will undoubtedly lean on the Chancellor’ side. Just ask Madrid how it feels.