Merkel says European banking union is a future task, not to happen soon

German Chancellor Angela Merkel is not willing to move ahead quickly with allowing direct aid for European banks from either EFSF or ESM. Instead, she confirmed that every state will have to guarantee for its banks. This will lead to higher deficits in states where banks need to apply for money from the bailout funds.

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In an interview for public TV station ZDF, Angela Merkel left no doubt that Spain and Italy will not receive any direct and unconditional aid for saving their banks via the ESM. Financial aid to banks can only be granted by a European bank supervisor. Until this authority is established, European governments will have to guarantee for all bailout-money as the legal structure of the EFSF and ESM indicate. Angela said: “The Spanish program which will pass legislation this week, and this is of course done of through the Spanish government. These are our standards. Now we have started discussing the question what happens when we have European bank supervision. What will happen, when this authority checks national banks, when restructuring is needed, and what happens if we need European aid for national banks. To establish such a supervisor will give us the possibility of a much tighter control. This is the future task. We have to work on this. And finally, the German parliament will vote on this.”

Merkel emphasized in her interview that there will be no solidarity without any control: “All attempts – since the first summit – that we have dealt with the Euro question repeatedly attempt solidarity and still do not achieve any control. All these attempts will not have any chance with me or with Germany.

The statement indicates that Merkel is cautious about using the official rescue vehicles ESM or EFSF for bailing out banks. She contradicted the designated ESM-boss Klaus Regling, who said that in the case of saving the bank the states would not take any guarantees. This would mean that Germany will take over 27 percent of the liability of all risks according to Germany’s share in the rescue funds.

The bank supervision will be a future assignment. Merkel believes it will still take a bit of time until the bank supervision will be properly established. Until then the aid would come through makeshifts.

Through a memorandum with Spain there have been detailed instructions which constraints the banks have to have filled in case of being bailed out by the European Union. The memorandum is upheld however very technocratic. Also if some certain control mechanisms sound good in reality they are probably not so worthwhile: e.g. the EU-Commission has received the permission to able to investigate the Spanish banks whenever they want. This might be difficult to achieve as only few people even within the banks really understand the meaning of the numbers – and hence are able to weigh on risks and set proper steps to minimize risks.

So a complete aid program for Spain becomes more likely, which could be managed by the EFSF. For Italy the outlook seems grimmer: German Federal Bank President Jens Weidmann in an interview in the ‘Börsen-Zeitung’ took a stand towards Italy, saying that high rates for sovereign bonds cannot be a reason alone why Italy should receive aid. Furthermore the Italians like the Spaniards should put on a hard restricting program to gain trust on the markets again.

Merkel’s caution indicates that she is not certain anymore if the rescue of the Euro is anymore possible. The needed €100 billion for Spain will only be cashed out after further stress tests and investigation have been done by economic control societies. Observers doubt that Spanish banks have that much time left. In particular they expect that through rescuing the banks a higher Spanish sovereign deficit will worry the bond markets. Through this however, a full blown bailout of Spain becomes inevitable.

Merkel’s enthusiasm of keeping Greece in the Euro also seems to have declined. Asked if Greece should be given more time for getting on track with the agreed austerity measures, Merkel said “I consider the binding agreements a good thing. We have seen the less we kept our commitments the bigger the problems became. I am waiting for the report of the Troika. I have set for myself that the groundwork will be dependent on the report and that is why we have to wait a couple of weeks. Then we will know what decisions we will have to make.”
This does not sound anymore that trustworthy for Greece as a necessary member of the Euro- zone. It is highly unlikely that Merkel does not already have interim reports from the troika. The public findings from the troika reveal that Greece has done nothing to adhere to the set restrictions the restructuring program would through be factually worthless.

Although Italy's Mario Monti is pushing hard, Angela Merkel does not want to give in on German key objectives for Europe such as stability and accountability. (Photo: consilium)

Although Italy’s Mario Monti is pushing hard, Angela Merkel does not want to give in on German key objectives for Europe such as stability and accountability. (Photo: consilium)

Apparently Merkel has now recognized the reality of the Euro crisis. She talked surprisingly more about Europe and not very much about the Euro. She claimed, “The next year’s German national election will also be determined how Europe is standing” For Merkel Europe ought to be a stability union. Many European states like France or Italy have a very different approach. Merkel also abandoned her view that the Euro and Europe are synonyms. She said, “The common currency has given us many advantages. We have the biggest market of the world. We can compete against China and India. Without Europe, we cannot express our values, visions and ideals.” If Merkel still were convinced about the dominant role of the Euro in keeping Europe together, she would have said, “Without the Euro our values etc. cannot be shared together anymore.” It seems like the German chancellor has become quite realistic about the possible outcome of the Euro crisis, having to consider several options and not putting only the bet on the survival of the common currency.

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