The European Commission has launched a consultation on technical details underpinning a European crisis management framework for the financial sector. The main measures proposed:
- Preparatory and preventative measures such as a requirement for recovery and resolution plans and powers for authorities to require banks to make changes to their structure or business organisation where such changes are necessary to ensure that the institution can be resolved;
- Powers for supervisors to take early action to remedy problems before they get out of hand such as the power to change the managers;
- Resolution tools which empower authorities to take the necessary action, where bank failure cannot be avoided, to manage that failure in an orderly way;
- A framework for cooperation between national authorities.
The two main principles proposed by the Commission are:
- Effective arrangements which ensure that authorities coordinate and cooperate as fully as possible in order to minimise any harmful effects of a cross-border bank failure, and
- Fair burden sharing by means of financing mechanisms which avoid use of taxpayer funds.
Now, the problem is that we already have a situation that may well get out of hand. Fortune has quoted Scott Minerd, chief investment officer at Guggenheim Partners, who thinks the entire banking system of Europe could be on the brink of disaster (I recommend reading the whole article). If this is true, the Commission’s initiative will not have the time to translate into meaningful EU policy. More, the proposal is not sufficient to solve the problems of the EU banking sector, which is heavily exposed to sovereign debt.
Scott Minerd says that it’s now up to Germany to take leadership in organizing a fiscal union and creating a common EU bond. He rightly points out that this means a true federalization of the European Union, since fiscal policy will be, to some extent, managed on EU level.
In other words the impending banking crisis in the European Union could result in a true federalization – the dream of the founding fathers of the EU. But it sounds simpler than it actually is. Many things can go wrong, and the markets are not exactly ready to accommodate the Hamletian dilemmas of EU Member State governments. The recent approach of Germany and France to coordinate positions and try to sell them as unconditional proposals is not sustainable. EU governments should discuss options multilaterally, taking into account varying positions and nuances. We need true European consensus on fiscal governance, not empty declarations on the centrality of the Economic and Monetary Union.
Posted in Budget and Finance, EU Reform, Institutional Affairs, Internal Market
Tagged bank failures, bank resolution, banks, consultation, crisis management mechanism, Economic and Monetary Union, federalization, financial sector, sovereign debt
The idea for an amendment of the founding Treaties in order to accommodate a permanent bail-out mechanism is on the table after the last European Council meeting. Now there are new developments and opinions that touch on this subject.
CEPS has published three reports that contemplate on possible Treaty amendments – a post-mortem on the European Council, an overview of revision procedures under the Lisbon Treaty, and a more specific overview of the practicalities of the Lisbon Treaty revision(s). All documents suggest that a limited revision of the Treaties is achievable. The more specific proposals are:
- amending art. 122 TFEU, and including a reference to financial stability (plus a permanent European Financial Stability Facility – EFSF, created on an intergovernmental basis), or
- adding a reference to art. 143 TFEU – the legal basis to extend the existing EU support mechanism to non-euro area member countries in art. 136 TFEU – the special Treaty article for the euro area countries.
The authors note that the viability of both approaches will depend on the interpretation whether such an amendment would affect the no-bailout clause in Art. 125 TFEU, thereby changing the nature of monetary union and creating a fiscal transfer union (in German Transferunion). Additionally, it is arguable whether such an amendment would constitute a change to the “essential scope and objectives” of the EU, thus requiring an ordinary revision procedure.
Meanwhile some Dutch parties are trying to force a preliminary referendum on any pending Lisbon Treaty amendments.
It appears that any proposal for Treaty amendment must be considered very carefully in the light of possible ratification, as well as taking into account the no-bailout clause of art. 125 TFEU. My personal conviction is that any institutionalisation of a permanent bailout mechanism is legally troublesome, and in any case should be subject to ordinary revision procedure. But first of all we need to see the amendments in print before speculating on their legal essence.
The European Council has apparently decided that some limited amendments of the EU Treaties are necessary in order to establish a permanent crisis management mechanism for the eurozone. Herman Van Rompuy and the European Commission have been mandated with preparing proposals for such a crisis mechanism – which would provide emergency lending in the event of a sovereign-debt crisis. The proposal for the restriction of voting rights of Member States violating fiscal stability requirements seems to have been shelved for the moment.
An important feature of the mandate is the question whether a simplified revision procedure can be used (art. 48, para. 6 TFEU). The simplified procedure may be used for the amendment of provisions in part three of TFEU (Union Policies and Internal Actions). The European Council acts by unanimity after consulting the European Parliament and the Commission, and the European Central Bank in the case of institutional changes in the monetary area.
The main requirement for the simplified revision procedure, however, is that it should not increase the competences conferred on the European Union in the Treaties. This test is very important and it remains to be seen how any meaningful crisis management mechanism could pass it.