First the squabbles, then the fudge

  

Amidst the euphoria unleashed by the European Central Bank’s bond-buying plan, it is easy to miss the immense challenges posed by two complex dossiers that have just landed on leaders’ desks: the proposed EADS/BAE merger and a planned single banking supervisor, writes Hugo Dixon.

Hugo Dixon is the founder and editor of Reuters Breakingviews.

European integration tends to advance first with squabbling then with fudge. Every country has its national interest to defend. Some politicians appreciate the need to create a strong bloc that can compete effectively with the United States, China and other powers.

But that imperative typically plays second fiddle to more parochial concerns with the result that time is lost and suboptimal solutions are chosen.

Amidst the europhoria unleashed by the European Central Bank’s bond-buying plan, it is easy to miss the immense challenges posed by two complex dossiers that have just landed on leaders’ desks: the proposed EADS/BAE merger; and a planned single banking supervisor.

Look first at the plan to create a defence and aerospace giant to rival America’s Boeing. This has been under discussion since at least 1997 when the UK’s Tony Blair, France’s Jacques Chirac and Germany’s Helmut Kohl called on the industry to unify in the face of US competition.

London, Paris and Berlin are the key players in this game because they have the major assets.

Since 1997, progress has been patchy. Airbus, previously an awkward Franco-German-British consortium, was gradually turned into a proper company wholly owned by EADS - and EADS itself was created by the merger of France’s Aerospatiale and Germany’s Dasa.

But Paris and Berlin insisted on a dysfunctional governance structure designed to balance their respective power rather than promote an effective organisation and EADS’ early years were bedevilled by scandal.

What’s more, BAE opted to stay out of European integration, instead merging with Britain’s Marconi and going on a US acquisition spree.

The cost of developing new products, such as fighter aeroplanes, is huge: Europe’s last major initiative in this area, the Eurofighter, was developed through another suboptimal consortium. If Europe can’t get its act together, BAE may eventually find itself swept into the arms of a large US group and governments may ultimately be forced to buy American.

Being dependent on even such a close ally should not be their first choice. So there is a strategic benefit in creating a streamlined European defence and aerospace group.

The best solution would be to merge EADS and BAE, and run the new group on commercial lines. The politicians would abandon their right to decide who would manage it or where its factories and research centres would be located.

The most important interests of France, Germany and Britain could be protected by ring-fencing their secrets and giving each government a veto over any takeover of the group.

To be fair, the planned merger - which leaked last week - takes a big step in this direction. A complex shareholder pact, which balances French and German interests in EADS, would be scrapped. The private shareholders involved in that pact - France’s Lagardere and Germany’s Daimler - are also expected to sell out eventually.

The snag is that Paris would keep a stake of around 9 percent, potentially letting it pull the strings from behind the scenes. Both London and Berlin seem worried about that. Germany may also be queasy about a plan, so far unannounced, to locate the merged company’s defence HQ in the UK and its civilian aerospace HQ in France.

Even if these circles can be squared, Washington may cause trouble. BAE has been able to acquire a substantial US defence business because of the special military relationship between London and Washington.

If the US administration concludes that the new group is effectively controlled by Paris, with which relations are cooler, it may put so many controls on its US business that it becomes commercially unattractive.

It would be better if France sold out of the combined group and de-politicised it entirely. But that doesn’t seem on the cards.

Now look at the eurozone’s plans for a banking supervisor, for which the European Commission unveiled a blueprint last week. Again, the idea is sensible, albeit not a silver bullet. A centralised supervisor based on the ECB might be able to clean up the banking cesspit in places like Greece, Spain and Ireland.

This could pave the way for struggling lenders to be recapitalised with eurozone money rather than national money. And that, in turn, could play a role in diminishing the euro crisis.

There are, though, at least two major problems. First, Berlin doesn’t want its local savings banks supervised by the ECB. This is largely a matter of protecting vested interests, as the Sparkassen are closely linked to local politicians.

But it is precisely such incestuous relationships that caused mayhem with Spain’s savings banks, the cajas. It would set a bad precedent if Germany could cut a special deal for itself merely because it is the biggest boy in the euro class.

Second, how will the interests of the 10 countries that are part of the European Union but don’t use the single currency be protected as the eurozone moves ahead with banking integration?

This is of particular concern for the UK, Europe’s financial capital. Under the European Commission’s plans, the 17 members of the euro would caucus together to decide on matters like technical rules for banking which cover the entire EU. London could therefore find itself perpetually outvoted.

There may be ways of squaring these circles. But, as with defence integration, politicians will need to keep their eye on the big picture even as they defend their legitimate national interests. That hasn’t always been their forte.

 

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