After Germany’s elections, when Chancellor Angela Merkel eked out another win but her party failed to retain uncontested control of the government, the stage was set for a battle over a number of issues that are hotly contested in the country. One of those issues is the proposed eurozone banking union.
Merkel, head of the Christian Democratic Union (CDU), found herself in the position of having to negotiate with the Social Democrats (SPD) on where funding will come from to help failing banks, and when and by whom those banks would be shut down. Germany has been steadfastly opposed to surrendering control to the European Union, insisting instead that any joint body with the authority to shutter failed banks has to be separate from the European Commission. Otherwise, Berlin has said that the EU treaty would need to be changed to accommodate such a plan, and that its own laws would require changing as well since ceding control outside the country goes against its constitution.
Also at issue has been any use of the European Stability Mechanism (ESM) to help failed banks, rather than the Single Resolution Mechanism (SRM)—a common resolution fund being built by banks for just such eventualities.
The compromise that was reached could put a spanner in the works of progress toward a banking union, since it incorporates both of those positions. While most of the European community supports use of the ESM until the SRM has been built up to a useful size, Finland supports Germany against any such use. However, with France in particular championing the concept of an ESM/SRM bailout, Spain, Italy, Portugal and Belgium are coming in on the side of France.
Germany has two dogs in this fight. First is the fact that Germany doesn’t want any outside agency having a say over if and when any of its own banks should be shuttered despite having some banks in dire need of assistance. The new political coalition has specified in its governing agreement that local and regional banks must be excluded from the ECB’s supervision. That could cause problems for Germany if ECB stress tests reveal flaws in the German banking system, and that’s a distinct possibility.
Second, Berlin is opposed to allowing the ESM to function as a backstop for the SRM. Never a fan of having to bail out another country’s banks, Germany has followed a strict austerity-plus-haircuts strategy that has made it vastly unpopular among weaker Eurozone states, particularly when its own humming economy is taken into account.
But change could be in the wind. While in general German banks are stronger than those of other countries in the Eurozone, there are exceptions, and stress tests could shine a light on those exceptions.