European Banking Union Not Enough: Investors

To act or not to act? Europe may be doomed either way, since apparently investors not only do not have faith in officials to take decisive action on the debt crisis but also do not seem to believe that a bold solution proposed by some can work—because it does not go far enough. Consumer sentiment fell in June throughout Europe as unemployment in Germany rose. And in England, Barclays settled with investigators over charges that it took part in a Libor-fixing scheme.

Bloomberg reported Thursday that a proposed banking union to be discussed at an EU summit meeting Thursday and Friday is regarded by investors to be a failure in the making unless it also incorporates shared liabilities. The 27 EU leaders plan to discuss over the next two days methods to coordinate bank oversight, unite national deposit guarantees and blend crisis management powers as they seek to head off further escalation of the debt crisis.

However, investors, who already have demonstrated that they have little faith in the ability of leaders to take solid action, aren’t having any. “Talk about a banking union is too premature,” Guy de Blonay said in the report. De Blonay, a London-based fund manager at Jupiter Fund Management, which oversees about $37.5 billion, was quoted saying, “Europe hasn’t taken steps to restoring an orderly sovereign debt market. You need economies to borrow at a decent rate.”

Currently Spain and Italy are caught between needing money to fund their governments and soaring yields on sovereign bonds. Cyprus, already struggling with the handicap of its close economic ties to Greece, on Monday requested its own bailout from the eurozone.

One strategy that is on the table is a shared Eurpean deposit guarantee program. Political leaders want to prevent another instance of deposit flight, such as occurred in Greece, because if depositors pull their money from a country’s banks that country must turn to the European Central Bank (ECB) for funding.

However, while individual banks, central banks and governments could contribute the money for a joint guarantee plan, only a “full backup from the ECB would make an EU insurance scheme credible,” Mediobanca analysts Antonio Guglielmi and Alain Tchibozo, said to clients in a June 25 note.

Daniel Zuberbuehler, former vice chairman of the Swiss Financial Market Supervisory Authority and now a financial services consultant at KPMG in Zurich, questioned in the Bloomberg report whether such a plan would work. “The question around a banking union is, are the funds there to make good on the promises?” he was quoted asking. “It’s an issue of credibility. Who pays and is the system capable of footing the bill?”

He added that a banking union “only makes sense if you have a paymaster agreement. Only after you have a fiscal union and more harmonization in Europe does it work.” The U.K. has already opted out of participating in any such plan, according to Chancellor of the Exchequer George Osborne, who said in a BBC interview on June 7 that the country would not join any eurozone banking union and that he would look for means to ensure that the single market operates throughout the EU. That led Zuberbuehler to comment, “From a global perspective, if a banking union were to be limited to the eurozone, without the U.K., it would be a parochial aspiration.”

Chancellor Angela Merkel of Germany has repeatedly voiced her opposition to any shared plan, and as a result has become increasingly estranged from many eurozone leaders. France, Spain and Italy in particular have united against her position, pressuring her to consider closer fiscal union strategies at the G20 summit meeting 10 days ago.