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| Deal on Banking Union Will Test Goal of United Europe | Deal on Banking Union Will Test Goal of United Europe |
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| BRUSSELS — Battling to defend its credibility after a series of troubled bank failures across the Continent, the European Union hoisted a long banner on the outside wall of its Brussels headquarters last year to trumpet Europe’s march “toward a genuine economic and monetary union.” | BRUSSELS — Battling to defend its credibility after a series of troubled bank failures across the Continent, the European Union hoisted a long banner on the outside wall of its Brussels headquarters last year to trumpet Europe’s march “toward a genuine economic and monetary union.” |
| It was hardly a rousing battle cry. But it did at least acknowledge that despite the adoption of a common currency, the euro, Europe still had much to do to achieve real economic and monetary integration, a central pillar of the so-called European project since the early 1990s. | It was hardly a rousing battle cry. But it did at least acknowledge that despite the adoption of a common currency, the euro, Europe still had much to do to achieve real economic and monetary integration, a central pillar of the so-called European project since the early 1990s. |
| Shortly before midnight on Wednesday, after months of meetings in Brussels that often dragged into the wee hours, European finance officials finally reached a deal on how to plug a gaping hole in Europe’s economic defenses, agreeing to a centralized system to shut down sickly banks in the 17 member nations that use the euro. | Shortly before midnight on Wednesday, after months of meetings in Brussels that often dragged into the wee hours, European finance officials finally reached a deal on how to plug a gaping hole in Europe’s economic defenses, agreeing to a centralized system to shut down sickly banks in the 17 member nations that use the euro. |
| But as with many of Europe’s grand ambitions, the construction of what was conceived as a solid banking union has been crimped by the often contradictory interests of different countries. The exercise has yielded more of a muddle than a unifying mission. | But as with many of Europe’s grand ambitions, the construction of what was conceived as a solid banking union has been crimped by the often contradictory interests of different countries. The exercise has yielded more of a muddle than a unifying mission. |
| A banking union has often been described as Europe’s most ambitious project since its decision in 1992 to establish a common currency. But the effort to create one has highlighted how difficult it is to act ambitiously for a bloc that has grown from six to 28 member states. It has no clear shared view on whether it is the nucleus of a future European state, a free-trade zone, or merely an intergovernmental organization that irons out disagreements between countries. | A banking union has often been described as Europe’s most ambitious project since its decision in 1992 to establish a common currency. But the effort to create one has highlighted how difficult it is to act ambitiously for a bloc that has grown from six to 28 member states. It has no clear shared view on whether it is the nucleus of a future European state, a free-trade zone, or merely an intergovernmental organization that irons out disagreements between countries. |
| Add to this the fact that the bloc’s leaders have starkly different views of what caused Europe’s financial crisis and the long economic malaise that followed, and “it is no wonder the E.U. finds it so hard to take decisions,” said Charles Grant, director of the Center for European Reform, a policy research group. “You have a sick patient on the bed and doctors gathered around who cannot decide on the nature of the illness or the medicine required to cure the patient.” | Add to this the fact that the bloc’s leaders have starkly different views of what caused Europe’s financial crisis and the long economic malaise that followed, and “it is no wonder the E.U. finds it so hard to take decisions,” said Charles Grant, director of the Center for European Reform, a policy research group. “You have a sick patient on the bed and doctors gathered around who cannot decide on the nature of the illness or the medicine required to cure the patient.” |
| Making decisions still harder, Mr. Grant added, was the effect of a pledge last year by the president of the European Central Bank, Mario Draghi, that the bank would “do whatever it takes” to defend the euro. Mr. Draghi effectively calmed frenzied markets, but the promise also eased the anxieties that can prod urgent action. The European Union, Mr. Grant said, “needs the spur of constant crisis for governments to do things against their own short-term interest.” | Making decisions still harder, Mr. Grant added, was the effect of a pledge last year by the president of the European Central Bank, Mario Draghi, that the bank would “do whatever it takes” to defend the euro. Mr. Draghi effectively calmed frenzied markets, but the promise also eased the anxieties that can prod urgent action. The European Union, Mr. Grant said, “needs the spur of constant crisis for governments to do things against their own short-term interest.” |
| Instead of establishing a European equivalent of the Federal Deposit Insurance Corporation, the powerful banking authority set up by President Franklin D. Roosevelt in 1933 in response to the Great Depression, Europe has opted for a meek central authority that Mr. Draghi warned this week risked being “single in name only.” | |
| This, said Carsten Brzeski, an economist with ING Bank, means that Europe will end up with a very different creature from the F.D.I.C., which has a long record of dealing swiftly with troubled banks. The federal agency has a reputation for moving in on a Friday afternoon after the close of business and, its staff fueled by takeaway pizza, working straight through the weekend to tidy up the mess before Asian markets open for business Monday morning. | This, said Carsten Brzeski, an economist with ING Bank, means that Europe will end up with a very different creature from the F.D.I.C., which has a long record of dealing swiftly with troubled banks. The federal agency has a reputation for moving in on a Friday afternoon after the close of business and, its staff fueled by takeaway pizza, working straight through the weekend to tidy up the mess before Asian markets open for business Monday morning. |
| Since the onset of the financial crisis in 2008, the F.D.I.C. has closed nearly 500 banks in the United States. | Since the onset of the financial crisis in 2008, the F.D.I.C. has closed nearly 500 banks in the United States. |
| “This is what Europe is aiming for, but what we’ve gotten is very cumbersome,” Mr. Brzeski said. “Instead of pizza weekends when a bank fails, we may end up with pizza months, because the national authorities are always going to want to have the last say.” | “This is what Europe is aiming for, but what we’ve gotten is very cumbersome,” Mr. Brzeski said. “Instead of pizza weekends when a bank fails, we may end up with pizza months, because the national authorities are always going to want to have the last say.” |
| Nicolas Véron, a senior fellow at Bruegel, a research institute in Brussels, said the most important step toward banking union had already been taken, the creation of a pan-European financial supervisor under the umbrella of the European Central Bank. The single supervisor appears to be moving rapidly toward reality. A new head was approved last week by the European Parliament, with the mandate to hire up to 1,000 bank examiners. | Nicolas Véron, a senior fellow at Bruegel, a research institute in Brussels, said the most important step toward banking union had already been taken, the creation of a pan-European financial supervisor under the umbrella of the European Central Bank. The single supervisor appears to be moving rapidly toward reality. A new head was approved last week by the European Parliament, with the mandate to hire up to 1,000 bank examiners. |
| That creates a potential for fireworks next year, when the banking supervisor starts examining the health of financial institutions to determine the firmness of their finances. Analysts calculate that European banks need to raise at least 100 billion euros, or $137 billion, of new capital, though no one really knows and estimates run as high as €500 billion. The resolution system agreed to in principle on Wednesday night — which envisions a pooled war chest of just €55 billion to be set up over 10 years — is unlikely to be of much help in steadying market nerves in the middle of any potential upheaval. | That creates a potential for fireworks next year, when the banking supervisor starts examining the health of financial institutions to determine the firmness of their finances. Analysts calculate that European banks need to raise at least 100 billion euros, or $137 billion, of new capital, though no one really knows and estimates run as high as €500 billion. The resolution system agreed to in principle on Wednesday night — which envisions a pooled war chest of just €55 billion to be set up over 10 years — is unlikely to be of much help in steadying market nerves in the middle of any potential upheaval. |
| Still, given the divergent forces working against consensus, it is perhaps remarkable that Europe’s finance ministers were able to arrive at this much of a unified approach. Even if the deal struck on Wednesday does not ensure that teetering banks will not topple chaotically, the fact of this accord indicates that European Union members are willing to focus on trying to solve big problems — no matter how imperfect the solutions-by-committee might seem. | Still, given the divergent forces working against consensus, it is perhaps remarkable that Europe’s finance ministers were able to arrive at this much of a unified approach. Even if the deal struck on Wednesday does not ensure that teetering banks will not topple chaotically, the fact of this accord indicates that European Union members are willing to focus on trying to solve big problems — no matter how imperfect the solutions-by-committee might seem. |
| Behind the numbingly technical considerations involved in the creation of the so-called Single Resolution Mechanism — technocratic jargon for a central authority to wind up ailing banks — two prickly issues dogged the months of debate. Who makes the decisions? And who pays for them? | Behind the numbingly technical considerations involved in the creation of the so-called Single Resolution Mechanism — technocratic jargon for a central authority to wind up ailing banks — two prickly issues dogged the months of debate. Who makes the decisions? And who pays for them? |
| They are questions that have tortured champions of a unified Europe ever since France, West Germany, Belgium, Italy and the Netherlands agreed in 1951 to pool some of their sovereignty and establish a “high authority” to run the European Coal and Steel Community. But having changed over the decades into the European Economic Community and then the European Union, and expanded into Eastern and Central Europe, the mechanics of European integration have grown so complex and cumbersome that even the most straightforward decisions can often require months of deliberation. | They are questions that have tortured champions of a unified Europe ever since France, West Germany, Belgium, Italy and the Netherlands agreed in 1951 to pool some of their sovereignty and establish a “high authority” to run the European Coal and Steel Community. But having changed over the decades into the European Economic Community and then the European Union, and expanded into Eastern and Central Europe, the mechanics of European integration have grown so complex and cumbersome that even the most straightforward decisions can often require months of deliberation. |
| Adding to the problems created by the Union’s sprawling size has been a steady slowing in what used to be the motor driving European decision-making: a close partnership between France and Germany. In the early decades after World War II, France and Germany generally acted in tandem, seeing their interests as roughly aligned. But this arrangement has broken down as Germany has emerged as an economic powerhouse wary of being left with the bill for the mistakes of weaker countries, and France has limped along, unable to put its own house in order but forever calling for more “solidarity” between member states. | Adding to the problems created by the Union’s sprawling size has been a steady slowing in what used to be the motor driving European decision-making: a close partnership between France and Germany. In the early decades after World War II, France and Germany generally acted in tandem, seeing their interests as roughly aligned. But this arrangement has broken down as Germany has emerged as an economic powerhouse wary of being left with the bill for the mistakes of weaker countries, and France has limped along, unable to put its own house in order but forever calling for more “solidarity” between member states. |
| This split has played out in the banking union haggling, with Germany repeatedly putting a brake on steps that might lead to the use of German money to bail out banks in other countries, while France has pressed for “mutualization” of the burden between states. | This split has played out in the banking union haggling, with Germany repeatedly putting a brake on steps that might lead to the use of German money to bail out banks in other countries, while France has pressed for “mutualization” of the burden between states. |
| A broader division has meanwhile opened up between factions of countries, notably Germany, that have advocated austerity as a cure to Europe’s economic ills, and those that balk at budget cuts as a recipe for permanent recession. | A broader division has meanwhile opened up between factions of countries, notably Germany, that have advocated austerity as a cure to Europe’s economic ills, and those that balk at budget cuts as a recipe for permanent recession. |
| Nearly everyone, though, agrees that a key to unlocking future growth is the establishment of a system to kill off comatose banks and restructure those that can be saved so that lenders can start lending again. | Nearly everyone, though, agrees that a key to unlocking future growth is the establishment of a system to kill off comatose banks and restructure those that can be saved so that lenders can start lending again. |
| But unlike financial markets, which react in seconds, or even the sluggish decision-making system in the United States, where matters as important as a budget can produce months of deadlock, the European Union operates on a timeline determined by the fact that it does not reach decisions as a single entity but as a looser ensemble of separate democracies. | But unlike financial markets, which react in seconds, or even the sluggish decision-making system in the United States, where matters as important as a budget can produce months of deadlock, the European Union operates on a timeline determined by the fact that it does not reach decisions as a single entity but as a looser ensemble of separate democracies. |
| “The time necessary for democracy is much longer than the time of the markets,” Michel Barnier, a senior official at the bloc’s policy executive, the European Commission, and an architect of the banking union plan, noted ruefully this month after yet another late-night meeting without an agreement. | “The time necessary for democracy is much longer than the time of the markets,” Michel Barnier, a senior official at the bloc’s policy executive, the European Commission, and an architect of the banking union plan, noted ruefully this month after yet another late-night meeting without an agreement. |
| Mr. Véron predicted that the resolution plan would never fulfill its purpose, but that historians might someday look back on it as having paved the way toward something better. Too much decision-making remains with the member states and the bailout fund “lacks the financial firepower for addressing financial crises,” he said. | Mr. Véron predicted that the resolution plan would never fulfill its purpose, but that historians might someday look back on it as having paved the way toward something better. Too much decision-making remains with the member states and the bailout fund “lacks the financial firepower for addressing financial crises,” he said. |
| “I expect this unseemly Single Resolution Mechanism design to fail at some point, not meeting its stated ambition,” Mr. Véron said. “But that failure might be a necessary step on the road to a better design.” | “I expect this unseemly Single Resolution Mechanism design to fail at some point, not meeting its stated ambition,” Mr. Véron said. “But that failure might be a necessary step on the road to a better design.” |
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