By James Wilson in Frankfurt
Germany’s Bundesbank has warned of possible risks from banking union in the EU, saying it would be tantamount to a back-door pooling of sovereign debt, unless accompanied by fiscal union that allowed control over national budgets.
José Manuel Barroso, president of the European Commission, has urged all EU countries to move quickly to integrate their banking systems through cross-border supervision and deposit insurance. Such “a very big step” could be enacted as soon as next year, Mr Barroso said in a Financial Times interview.
But Sabine Lautenschläger, vice-president of the Bundesbank, said banking union could only work in tandem with fiscal union – meaning some common cross-border binding rules on how countries could set budgets.
The views of Germany’s hawkish central bank reflect broader German opposition to any agreement that could leave the eurozone’s largest economy liable to bailing out banks in weaker countries, unless in return for measures that more closely integrate budget and spending policies.
Banks in Germany have already signalled opposition to having their existing deposit guarantee schemes potentially used to rescue banks in other countries.
The “decisive question” of banking union was the “interplay between liability and control” because a crisis in one country’s banks could require financial help from taxpayers in other countries, Ms Lautenschläger said. “Whoever accepts liability also has to have a right to control, especially when it is potentially a question of very large sums as in the case of a banking crisis.”
Speaking at a Bundesbank conference in Frankfurt, she said banking union without fiscal union would, in particular, benefit banks in weaker economies with higher refinancing costs. If those banks then bought more of their own countries’ sovereign bonds, they would, in effect, pass on cheaper refinancing costs to their domestic governments, Ms Lautenschläger said.
“The extremely important discipline of the market would be partially lost. Even more seriously, joint liability for banks would, at least, partially extend to the sovereign bonds of these countries,” she said. “The result would be joint sovereign liability through the back door – without the possibilities for intervention and control, and therefore the protection, of a fiscal union.”
Ms Lautenschläger also cast doubt on how quickly any banking union could be implemented, saying “comprehensive EU treaty changes” would be needed.