Wolfgang Schäuble’s destiny is to be a man who keeps having to listen to people talking about things he doesn’t want to hear about.
Germany’s finance minister, together with his counterparts from around Europe, will gather in Amsterdam on Friday to discuss, among other things, the future of the Banking Union — the major policy push undertaken by the euro area over the last few years to centralIze how it oversees its banks.
But like a band with growing musical differences, ministers can’t agree on what the next steps of the project should be, with Mr Schäuble playing the role of the blues purist who wants the group to move away from grand concepts and get back to basics.
Meeting room in the Dutch maritime museum where finance ministers will gather on Friday
Coming to terms with painful truths can take a long time, and the EU’s struggle to acknowledge an original sin built into its banking regulations is a case in point.
It’s a problem that dates back decades, and that finance ministers are going to tentatively grapple with at an informal meeting in Amsterdam this week. It centres on the regulatory treatment of sovereign debt, and we’ve got our hands on the options paper prepared for ministers by the Dutch presidency and posted it here.
While the subject may sound arcane, it’s extremely politically charged. The latest ructions over how to treat bank holdings in government debt are fanning the already hot flames of discord between Rome and Berlin, with Brussels as ever squeezed uncomfortably in the middle.
So what’s the problem? The EU has highly detailed legislation covering different aspects of banks’ activities, in order to ensure that institutions have enough financial reserves to cope with the risks that they are taking with their investments.
The rules cover everything from mortgage lending to complex trading in derivatives, but they have one glaring loophole, namely that many of the normal requirements, such as capital rules and exposure limits, don’t apply to banks’ purchases of European governments’ own debt. Read more
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Italian banks appear to be in trouble. Again. With €360bn in non-performing loans – by far the largest pile in the eurozone, and behind only Greece and Cyprus as a percentage of all outstanding loans – the market has been selling off Italy’s financial sector since the start of the year to where it’s now down about a third of its value since January. But their troubles have become acute again because of the struggles of one mid-sized bank, Banca Popolare di Vicenza, to raise the €1.8bn in capital the European Central Bank has demanded.
The share sale by Vicenza is being underwritten by UniCredit, Italy’s only systemically important bank, but last week UniCredit sought government assistance out of fear Vicenza’s shares wouldn’t be bought by nervous investors – and UniCredit itself would be left holding the bag. That, in turn, raised questions about UniCredit’s own balance sheet, where it already lags behind many of its peers in terms of financial health.
The Italian government isn’t in a place to help, however. First of all, it doesn’t have any money to throw at the problem; its national debt is already nearly 140 per cent of economic output, the highest in the eurozone outside of Greece, and there’s not a billion or two around to spare. Secondly, and perhaps more importantly, if Rome did intervene, it would have to follow the EU’s new post-crisis banking rules, which require the government to force losses on private investors before any public money can be used to rescue a bank. Read more
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One side-effect of “crisis Europe” has been a surplus of bombastic political rhetoric. In a crowded field Mark Rutte, the Dutch premier, stood out when likening the EU to the fall of the Roman Empire. Hungary’s Viktor Orban touched a nerve with his “no road back from a multicultural Europe” speech, which in turn built on his warning over the bloc “staggering towards moonstruck ruin”. And of course Fico is Fico. Read more
Juncker urged additional eurozone reform in his "state of the union" address in Strasbourg
When Jean-Claude Juncker this week told a packed European Parliament he intends to forge a eurozone system for guaranteeing bank deposits, the European Commission president’s intention was to send a firm message of determination to strengthen the single currency’s foundations.
But just days after Juncker’s “state of the union” address, his attempt to sow hopeful seeds has hit stony ground in Berlin, where the plan was taken more as a declaration of war.
Germany’s fightback begins when finance ministers gather in Luxembourg on Friday, and is set out in a “non paper” obtained by the FT. Our story on the document in the FT’s dead-tree edition is here, but for those who want a bit more detail, we’ve posted it here, too.
Unlike the series of emergency gatherings on Greece this summer, the weekend “informal” meeting of eurozone finance ministers was intended to be a calmer, and above all shorter, stocktaking of the health of the common currency.
Now, however, Germany has decided to use it as an opportunity to put down clear red lines in an attempt to redirect the eurozone reform discussion, which gained momentum following the mess of the July Greek bailout deal on what Berlin believes is an unacceptable course. Read more
The Franco-German contribution ahead of today's Brussels meeting contains little detail
When eurozone leaders decided last year it was time for another look at overhauling their common currency, the main driver was Mario Draghi, the European Central Bank chief who has been one of the main figures behind the push to make the eurozone a more fully integrated and centralised union.
But in the months since a Draghi-backed decision for the eurozone’s four presidents – the heads of the European Commission, European Council, eurogroup and ECB – to present another blueprint on the way forward at June’s EU summit, the appetite among political leaders for a step change, always lukewarm, has cooled even more.
If documents sent around to national capitals in recent days ahead of Tuesday’s Brussels meeting of EU “sherpas” – the top EU advisers to all 28 prime ministers – are any indication, the report being pulled together may propose little more than a bit of euro housekeeping in the near term. Although more ambitious plans could be included, the leaked documents show they will be relegated to the medium and long term – a tried and true EU tradition that is normally a recipe for bureaucratic burial.
Among the documents obtained by the Brussels Blog are a three-page summary of what the new report will look like (posted here) as well as a Franco-German contribution (the French version is here) and that of the Italian government (conveniently in English, here).
Although the Italians emerge as the most ambitious reformers of the lot, the “note for discussion by sherpas” makes pretty clear that the measures being contemplated for immediate action are the leftovers from recent reform efforts – streamlining and clarifying the EU’s crisis-era budget rules, for instance, and adding a bit more financial heft to the EU’s bank bailout fund. Read more
Lord Hill says that there will be no exceptions for member states who fail to jump into line on banker bonuses. Read more
German finance miniser Wolfgang Schäuble with Finland's Jutta Urpilainen at Monday's eurogroup
The German finance ministry is on the brink of an extraordinary achievement. Like many power shifts within the EU, it is happily hidden behind the most fiendish jargon. But if all goes to plan, Berlin is securing something rare and coveted in Brussels: the effective power to block future EU banking regulation.
Put another way, it is quietly resetting the ground rules of the single market in financial services without the need for treaty change or a referendum or a big speech. Take note David Cameron.
How has Berlin managed it? It is all concealed in the thicket of legal arguments over establishing Europe’s €55bn bank rescue fund via an intergovernmental agreement, rather than through the EU’s normal “community method”, where majority (or at least qualified majority) rules.
To translate: at German behest, the rules for pooling banking union rescue funds are laid out in a side-deal between governments, rather than under legislation agreed between EU member states and European parliament. Such intergovernmental pacts are allowed; remember the fiscal compact? But they are not supposed to change or impact the EU’s common rulebook, outlined in the EU treaties. Read more
Workers shutter a branch of Laiki Bank, which was closed under Cyprus' €10bn bailout last year
For those not following every twist and turn in the EU’s debate over how to bail out failing banks, it may come as a bit of a surprise that finance ministers are still fighting over who pays for a collapsed financial institution given the deal struck in December on this very issue.
But a three-page “issues note” sent to national capitals this week ahead of EU finance ministers’ meetings on Monday and Tuesday – obtained by Brussels Blog and posted here – makes clear that there are still a lot of unanswered questions about a new EU-wide bank rescue fund to pay for such bailouts. And it’s perhaps no surprise that most of the unanswered questions centre around one thing: money. Read more
Jean-Claude Trichet, right, with the parliament's economic committee chair, Sharon Bowles
The troika of bailout lenders has not been getting much love at the European Parliament’s ongoing inquiry into its activities in recent weeks. But the criticism is not just coming from MEPs in the throes of election fever. Predictions of the troika’s demise have come from some unexpected quarters, including current and former members of the European Central Bank executive board.
During the hearings, MEPs have particularly criticised the troika — made up of the International Monetary Fund, European Commission and the ECB — for its overly optimistic growth forecasts for bailout countries, which have been repeatedly revised downwards. Perhaps unsurprisingly, they have also suggested that the troika be subject to greater parliamentary oversight.
Hannes Swoboda, the Austrian social democrat who heads the centre-left caucus in the parliament, went further, saying the body is undemocratic, hostile to social rights and that the EU would be better off without it. Read more
Does David Cameron now need a reopening of the EU's treaties more than Angela Merkel does?
We have hardly heard a peep from Britain on the latest leg of Europe’s banking union. It is natural enough given the UK will be outside the proposed system for shuttering shaky banks, which is primarily for eurozone countries. But do not imagine it is unimportant for London. Strictly in terms of David Cameron’s plans to renegotiate Britain’s place in the EU, there has perhaps been no more worrying a development in Brussels all year.
Why? Cameron’s renegotiation strategy is partly based on this assumption: the eurozone will need a banking union to survive, and a fully-fledged banking union will need a re-write of EU treaties before 2017. That necessity opens the door for Cameron to press demands to repatriate powers.
The trouble is that this week’s banking union negotiation is showing that Germany and the eurozone will go to great lengths to avoid giving Cameron the leverage he craves. In one senior EU official’s words: “Nobody wants to give the keys to the UK”. Read more
ECB chief Mario Draghi, left, with eurogroup chair Jeroen Dijsselbloem at last night's meeting
Whenever it comes to eurozone backstops, it usually pays to be beware of fine print and Germans bearing gifts.
Eurozone finance ministers reached a tentative agreement in the early hours of this morning that is significant in this sense: it paves the way for a final deal on a common resolution system for the banking union.
In terms of substance, the big breakthrough is a commitment to establish a common backstop — by 2025 at the latest — that will provide taxpayer support to the bank resolution system, should its resources be overwhelmed in a crisis.
Germany was staunchly opposed so it represents an important concession to Italy, France and the European Commission. What it does not do, however, is detail what form that backstop should take — that is left open. And they have a decade to fight over what the commitment actually entails. Read more
Wolfgang Schäuble, centre, last week with Jeroen Dijsselbloem, right, and Dutch aide Hans Vijlbrief
EU finance ministers start descending on Brussels this evening for what is expected to be at least two days of marathon negotiations over the second leg of the EU’s nascent banking union: a new agency to deal with failing banks and an accompanying rescue fund to recapitalise them or wind them down.
Senior EU officials have begun to worry that, despite this being the second such gathering in as many weeks, differences are still so significant that a deal may not get done by the time the ministers’ bosses – the EU’s presidents and prime ministers – arrive in Brussels Thursday for their own end-of-the-year summit.
But if it falls to them, officials say the heads of government are unlikely to make final decisions on the resolution system at their two-day summit – and would only set new political parameters for their finance ministers, who might be forced to come back to Brussels over the winter holiday. Joy to the world.
So just where are the differences? The Lithuanians, as holders of the EU’s rotating presidency, helpfully produced a 19-page note for all delegations heading into tonight’s start of the talks, which Brussels Blog got its hands on and posted here. A summary on its main points after the jump. Read more
Are the Dutch attempting to lead a mutiny on bank reform? It is hard to tell whether the objections are serious enough to unravel the deal last week on the EU rules for handling a bank crisis. But something mildly rebellious is certainly afoot. And it could end in another golden-gloves showdown between Jeroen Dijsselbloem, the Dutch finance minister, and his Swedish sparring partner Anders Borg.
At issue is the draft deal on the bank recovery and resolution directive (BRRD), which was agreed between negotiators for the European parliament and EU member states on Wednesday, brining to a close months of difficult talks. The reforms give all EU countries a rulebook at national level to handle a bank in trouble and, if necessary, bail-in creditors to help foot the bill.
The Dutch, however, are unimpressed. They think the draft agreement offers too much freedom to governments wanting bailout banks with public money, rather than impose losses on bondholders. And it looks like they have a significant number of allies. Read more
Sweden's Borg, centre, during last night's meeting, where he sparred with his Dutch counterpart
It’s become something of a routine in the EU’s ongoing effort to build a “banking union” that finance ministers try to come to a deal at their normal Brussels meetings – only to fail and call a special emergency session at the 11th hour before a crucial summit.
It happened last December when ministers held a last-minute emergency meeting to agree a new EU supervisor for all eurozone banks; it happened again in June to get to a deal on rules for how much creditors should lose when a bank fails. After yesterday’s 15-hour marathon on a new EU bank resolution authority, ministers will now have one last shot next Wednesday before the last EU summit of the year begins the next day.
The hold-up this time is a dispute over how a new EU-wide bank rescue fund should function. And if anyone is looking for evidence of how much work still needs to be done, consider these two documents which were circulated among finance ministers late last night – one here outlining an emergency backup to the fund and another here on a new treaty to set up the fund. Both are almost completely substance free, meaning a lot must be done before Wednesday. Read more
Wolfgang Schäuble, the German finance minister, during the marathon talks on Tuesday
EU finance ministers meeting late into the night are edging closer to a deal on a new European bank executioner. But as always in the eurozone crisis, ministers have become hung up on small but potential significant details. Officials say the differences are significant enough that a final deal will have to be delayed until next week.
Brussels Blog got its hand on “Terms of Reference” circulated by the Lithuanians, who hold the rotating EU presidency, around 6:30pm this evening that includes some details that are new – but have already raised objections in certain quarters. We’ve posted a copy of the 10-page document here. Read more