VILNIUS, Lithuania – European Central Bank President Mario Draghi Monday put his weight behind a European Union banking union during a trip to Berlin, two days after Germany led an attack on a proposal to centralize control of failing lenders.
German Finance Minister Wolfgang Schaeuble sought to keep responsibility for failing banks in national hands during two days of meetings last week in Vilnius, Lithuania. He led a chorus of dissent against the European Commission’s plan to give itself final say over when to close banks and to create a 55 billion-euro ($73 billion) common fund for resolution costs.
If Germany derails momentum toward a year-end deal on a Single Resolution Mechanism, it may imperil efforts to restore confidence in the eurozone’s financial system. Draghi said the European Union needs to press ahead.
“Banking union should help speed up the repair of banks — that is if, as I hope, we end up with a strong single resolution mechanism,” Draghi said in Berlin Monday. “We need a mechanism that allows non-viable banks to be wound down without financial stability risks, as we see in the U.S.”
If the plan doesn’t move forward quickly, the ECB won’t be able to count on cross-border backstops if it encounters problems at euro-area banks. The ECB is scheduled to begin supervising lenders in the currency zone as soon as October 2014, forcing the European Union to grapple with who should decide when to close a bank and who will pay for it.
ECB Executive Board member Yves Mersch said Monday that the banking union is the “most immediate concern.” The ECB has started preparatory work on a review of banks’ balance sheets and will provide a proposal for the assessment in coming weeks, he said.
Schaeuble said the European Commission’s proposal must be overhauled because it’s on shaky legal ground and could endanger national control of budgets. In Vilnius, Schaeuble was joined by critics from Sweden to Slovakia.
At the same time, finance ministers renewed pledges to strive for an agreement quickly so financial markets won’t lose confidence that the currency zone is overcoming its crisis.
“There’s quite a lot to do,” Schaeuble said on Sept. 14 after two days of talks with his E.U. colleagues in Vilnius. “The path that the commission has proposed toward a resolution mechanism is a rocky one. There can be no doubt about it: we need to be on a legally certain foundation.”
The new resolution authority, along with ECB oversight, form the core of an effort to create a euro-area banking union that would sever the link between bank and sovereign debt.
Dutch Finance Minister Jeroen Dijsselbloem, who chairs meetings of euro-area finance chiefs, said he was confident that the E.U. would be able to strike an effective agreement. “For now I have no reason to assume that we end up with something weak and strange,” he said in Vilnius.
Objections to the commission’s strategy, proposed by E.U. financial-services chief Michel Barnier, included resistance to the planned common resolution fund and the scope of the system. Nations also voiced skepticism about expanded powers for the Brussels-based commission.
While defending the core of his Single Resolution Mechanism, Barnier said he could see limiting the new authority to lenders that have cross-border operations.
He also said the commission isn’t wedded to being chief decisionmaker in the resolution system and would welcome a discussion on alternatives. The commission put itself forward for the role because of its reading of the bloc’s treaties, Barnier said.
Sweden’s finance minister, Anders Borg, echoed the concerns of a number of his colleagues when he said handing the commission the power to shut down banks alongside its existing role as the bloc’s state-aid enforcer is a “conflict of interest.” This is a problem for Sweden even though it won’t join the banking union in “any foreseeable future,” he said.
Germany has spearheaded calls to drop the common fund and centralized authority in favor of a network of national resources, a stance Barnier said would leave the euro area vulnerable in future crises. Borg said similar arguments were made by Britain, Sweden and the Czech Republic.
Borg emphasized the necessity for euro countries to band together to prevent a resurgence of the sovereign debt crisis, now in its fourth year.
“It is necessary that the stronger countries are supporting the weaker countries,” he said. “I strongly back the idea that you need a fiscal backstop for a banking union among the euro countries.”