Scholz’s proposal to complete EU banking union greeted with cautious optimism 

Though the SPD had supported its introduction in 2009, many party members criticized the debt brake since then for limiting the governments’ leeway for economic stimulus. Recently elected SPD-co-leader Norbert Walter-Borjans called it an “investment brake”. That put Germany's Finance minister Olaf Scholz in an uncomfortable position. [EPA-EFE/HAYOUNG JEON]

European decision makers welcomed on Wednesday (6 November) German finance minister Olaf Scholz’s attempt to unlock the European Deposit Insurance Scheme (EDIS) proposal, but warned of the long process still ahead to reach an agreement.

The banking union is seen as the most ambitious initiative in European financial integration since the euro. Scholz celebrated its fifth-year anniversary this week by putting forward a proposal to end Germany’s blockade to the long-awaited EDIS.

Germany poses 'real problem' when protecting bank savers with European guarantee, says official

A senior EU official said on Tuesday (10 July) that an agreement on a European Deposit Insurance Scheme (EDIS) to protect savers across the bloc would be “very hard” given Berlin’s opposition.

The German plan was welcomed by supervisory authorities and regulators in a banking conference hosted by the European Central Bank (ECB) in Frankfurt on Wednesday.

Andrea Enria, president of the ECB’s single supervisory mechanism, said the proposal represented a “positive step” and expressed hope that Scholz’s initiative will provide the “political impetus” needed to address the lack of integration that still weights on the European financial sector.

Olivier Guersent, the European Commission’s Director General for financial services, added that the plan was “a very good starting point”.

EU leaders postpone completion of banking union

Despite previous promises to achieve results on eurozone reforms in June, EU leaders postponed until December an agreement on the backstop to wind down failing banks and did not include any date for starting discussions on a European deposit guarantee scheme.

Yves Mersch, the ECB’s member of the executive board, said that “every stone” to complete the banking union was welcomed, and expressed hoped that the German proposal could bring a new “self-reinforcing dynamic” to progress in other areas of eurozone integration.

Scholz’s initiative goes beyond the completion of the banking union. It also aims to boost Europe’s political weight on the global stage.

“I am calling on the EU to act now to strengthen Europe’s sovereignty in an increasingly competitive world,” the German finance minister wrote in an op-ed published in the Financial Times on Tuesday.

The financing of the European economy continues to depend heavily on its banking sector, after efforts to develop a capital markets union delivered only limited results. 

Compared with American and Asian rivals, European banks are struggling to cope with the ongoing low interest rate regime. And their already squeezed benefits are only expected to decrease as the economic slowdown continues.

In his proposal, Scholz suggests creating a reinsurance scheme based on repayable loans. Those would kick in once national deposit guarantees have been exhausted, and apply to deposits inferior to €100,000, which are protected by EU law.

The system is part of a broader package to address the fragmentation that is weakening eurozone banks on several fronts. It addresses insolvency plans and sovereign debt weighting, as well as taxation matters.

Scholz’s plan, however, caught his coalition partners in the German government by surprise. And it remains to be seen whether there is sufficient consensus in Berlin to push the discussion forward.

European sources, for their part, said that the German package reflects the technical work ongoing held over the last months in the EU Council’s working groups. 

Eurogroup discussion 

Eurozone finance ministers will take stock of progress made on Thursday (6 November), including the German plan. The aim is to agree a roadmap by the end of the year in order to reach a political agreement.

Despite the sense of excitement shared by many in Frankfurt, Enria warned that he expected lengthy discussions on the German plan, and ruled out an agreement during his term, which ends in 2024.

The chair of the Single Resolution Board, Elke Konig, was more optimistic and said that a deal could be reached before that date.

For Guersent, the German proposal remains “unambitious” compared to the Commission proposal for a European Deposit Insurance Scheme, which envisages a gradual process to achieve a fully integrated European-wide system. 

In return for ending his opposition to EDIS, Scholz demanded a revision of the sovereign debt treatment, considered by regulators as risk-free assets. Germany has been questioning this ponderation, and called for capital requirements on eurozone banks that reflect credit and concentration risks from sovereign exposures on their balance sheets. 

Commission passes the ball on sovereign debt rules

European Commission Vice-President Valdis Dombrovskis said on Wednesday (7 March) that he does not intend to amend the regulatory treatment of sovereign debt held by banks following inconclusive discussions at international level.

Instead of this option, Guersent argued in favour of a “simpler but not simple” way of ensuring that banks don’t pile up their own national public debt by including concentration thresholds or diversification ratios for public debt.

Guersent warned that several member states have linked an agreement on the review of zero-risk weight of sovereign debt with the project to create a European safe asset.

Although the idea of eurobonds remains taboo in many capitals, including Berlin, the Commission’s proposal for a synthetic European bond, integrating national debt obligations, is seen as a valid option by financial sector representatives.

As part of his package, Scholz also included another controversial initiative: the harmonisation of national insolvency schemes. This proposal is seen by many in Frankfurt and Brussels as a necessary tool to end the fragmentation that allowed some banks to escape the European resolution system, which imposes losses on bondholders and shareholders.

Liquidation of Italian banks shows limits of banking resolution rules

The European Commission’s approval of a €17 billion aid package for an orderly wind-down of Italy’s Veneto Banca and Banca Popolare di Vicenza, has sparked doubts about the strict application of banking resolution rules.

In addition, Scholz also called for progress on the tax front with a proposed agreement on the common consolidated corporate tax base (CCCTB), a long-time Commission proposal to end tax competition among EU countries.

And he insisted on reducing the volume of “bad” loans in eurozone banks, saying risk reduction was a prerequisite for Berlin to move forward on the mutualisation front.

Although the amount of “bad” loans held by eurozone banks has been halved to €600,000 million in the last five years (around 3% of total credits), the volume is still high in countries such as Italy or Cyprus. 

Brussels to unearth EU plans for corporate tax

The European Commission is preparing fresh proposals for a common consolidated corporate tax base (CCCTB) this year, but views diverge between Brussels, Paris and Berlin over the objectives of the plan.

[Edited by Frédéric Simon]

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