Luxembourg has witnessed that European integration still has its limits, even when war rages on Europe’s doorstep.
As world markets digested the Federal Reserve’s rate hike and the ECB’s emergency meeting, finance ministers of the 19 eurozone countries met at the EU conference centre on the Kirchberg plateau in Luxembourg and passed on an opportunity to further integrate financial services. Plans to complete Banking Union, first agreed in 2013, are now sent back to the drawing board.
A top European industry official described the decision to me as “a black day for Europe”.
Eurogroup President Paschal Donohoe clearly had hoped to announce better news at his post-Eurogroup press conference in Luxembourg. “What we saw happen here this evening is that, after a huge amount of work, is an example of how Europe works,” he heard himself say when explaining the Eurogroup’s decision to redraw the completion of Banking Union. “That is the way our economic union works.”
“I made the case for broader, for big collective steps, but what the Eurogroup has done today is agree to a step that will be a clear and strong improvement ahead of where we are today,” he said, trying to address the outcome in a positive manner.
Ulysses
Earlier, Donohoe, also Ireland’s finance minister, had brought his Eurogroup counterparts a copy of James Joyce’s Ulysses, a notoriously difficult-to-read book, with an order to them to read it by the time of their next meeting in July. The book describes a one-day stroll through Dublin by the book’s fictional character Leopold Bloom on 16 June 1904. Joyce aficionados around the world mark this day as Bloomsday, commemorating James Joyce.
This year, Bloomsday coincided with the Luxembourg Eurogroup meeting. If there is one comparison to be drawn between Ulysses and Banking Union, it’s probably that both are difficult to read.
Banking Union was introduced in 2014 as a comprehensive, four-pillar plan to boost the resilience of Europe’s banking sector and to prevent a repeat of the Great Financial Crisis, followed by bank bailouts using taxpayer funds. It harmonised bank sector rules and supervision, appointed the ECB as direct supervisor of the eurozone’s 120 biggest banks, and introduced a resolution mechanism to which banks will have committed some 80 billion euro by the end of 2023.
Fourth pillar still missing
Banking Union’s fourth pillar is still missing: the European Deposit Insurance Scheme, known as EDIS. EDIS had the potential to alleviate concerns in financial markets over diverging spreads in the eurozone, but so far this plan proved impossible to digest for wealthier eurozone countries.
Once implemented, this scheme could - in theory - create a situation where they could be on the hook for bailing out weaker ones if one of their banks were to go bust and savers would have to be compensated. Just imagine explaining to a German taxpayer that he/she needs to pay for policy mistakes in Italy.
In the absence of EDIS, eurozone countries did align national deposit guarantee schemes. Under these schemes, every eurozone savings account is guaranteed up to 100.000 euros.
EDIS becomes CMDI
Instead of EDIS, the Eurogroup now has adopted a new acronym: CMDI, or Crisis Management and Deposit Insurance. As Donohoe explained, CMDI does not yet have a formal action plan, but does have a plan of action. The Eurogroup has ordered the European Commission to come up with a new proposal, for decision in 2024.
CMDI needs to “strengthen the common framework for bank crisis management and also for governing the use of national deposit guarantee funds,” Donohoe said. “The European Commission is committed to progress, a political commitment has been made by agreeing to do it in different phases” and “a date is to be set at another point”.
The continued absence of a single eurozone deposit insurance scheme also justifies the divergence in eurozone spreads. Finance ministers, comfortable in the knowledge the ECB is preparing a special tool to target excessive divergence in these spreads, have passed on an opportunity to step up harmonisation in the eurozone financial sector.
Leaving it to ECB to pick up the pieces
Asked about these spreads, which widened earlier this month before the ECB announced its tool, Donohoe said the Eurogroup was “absolutely united in our view that the euro area will continue to be very robust and very resilient even as these market conditions change the way they are.”
In other words, the Eurogroup has decided to kick the can down the road, leaving it to the European Central Bank to pick up the pieces. Like Leopold Bloom, the Eurogroup ministers stand by and observe, without committing themselves.
In Flux is a regular column on Investment Officer shedding light on the Luxembourg financial ecosystem. Financial journalist Raymond Frenken is Editorial Manager of InvestmentOfficer.lu. He has followed financial markets and EU regulation for more than two decades. Earlier in his career he was Amsterdam bureau chief for Bloomberg News, Benelux correspondent for FT/MarketWatch, EU correspondent for CNBC in Brussels, and until 2021 director of communications at the European Banking Federation in Brussels.