German chancellor Angela Merkel signaled on Monday that she may be willing to support the creation of a European banking union to stem the continent’s spiraling debt crisis.
The proposal to create a pan-European banking authority that ultimately guarantees deposits throughout the European Union was floated by the European Commission last week and has since been embraced by highly indebted nations in the periphery of the eurozone, including Spain, which see it as a solution to the anxieties that pervade in their financial industries.
The weakness of the Spanish banking system threatens the stability of the entire country and therefore the single currency union. Madrid has asked for financial support for its banks through the European Financial Stability Facility which is currently permitted to borrow only for governments on capital markets, not companies.
An expansion of the EFSF’s powers or the erection of a separate banking guarantee scheme would likely decrease concerns of defaults in Spain but could cost taxpayers in the north dearly if banks indeed teeter on the brink of bankruptcy. Germany and its allies Austria, Finland and the Netherlands have therefore been lukewarm about the idea.
Merkel’s support of a banking union is heralded as a breakthrough but she notably referred only to European supervision of “systematically important banks” so that would exclude smaller and regional banks that don’t do a lot of business across borders and aren’t particularly exposed to peripheral sovereign debts.
As Alex Barker of the Financial Times points out, Berlin may be fond of federal European Union solutions, “But it is even more keen on running its own banks.”
Barker adds that the Germans are highly apprehensive of underwriting foreign bank deposits in the form of a common deposit insurance. “To Berlin, this proposal represents another ingenious scheme to pick the pocket of German taxpayers.”
Dutch and German government officials have said in recent days that such proposals can only work if there is greater fiscal integration in the eurozone. That means countries like Greece, Italy and Spain will need to get their fiscal houses in order before countries like Germany and the Netherlands will considering propping up their banking industries.
Savers in Spain aren’t holding their breaths for Chancellor Merkel to bail them out. The government revealed last week that some €100 billion in capital had left the country in the first three months of this year. That capital flight has probably only accelerated this quarter after Madrid invested €19 billion in the ailing lender Bankia in May to prevent its collapse.