However, the immediate aim of this proposal is crisis management – to create a single Eurozone standard paving the way for the direct recapitalisation of national banks by the fledgling European bailout fund (the ESM). Although not specifically mentioned, all eyes are on the weak Spanish banking system. Handing funds directly to the Spanish government would increase its indebtedness and borrowing costs, hence the growing desire to be able to tackle the problem at source. The realisation that a state’s fiscal position is inextricably linked to the strength of its banking system has also guided thinking. But it adds the risk that a banking union becomes a transfer union by the back door.
Other concerns remain, not least the German government’s doubts as to whether the ECB has the capacity to carry out this new Herculean task.
Beyond this there remains a real danger for the UK and its large financial services industry. The UK has in the past gained from a single “liberalising” EU rulebook aiding its exports. If there is to be more harmonisation, it shouldn’t be the sort of restrictive harmonisation we have seen a lot of recently. If the UK manages to influence the single rulebook, the City could benefit – if it does not, then there are dangers.
This danger is heightened by the possibility that the UK could now be outvoted and subject to Eurozone caucusing in the European Banking Authority (EBA), where regulations are drawn up, with the Eurozone countries voting with one voice under the banner of their new supervisor, the ECB. There are some tweaks to the voting rules that might help but it is unclear if these will work in practice.
As well as a loss of positive influence on the rulebook, this new system could make it harder for the UK to block rules designed around the Eurozone’s specific needs, which it may disagree with. However, as this agreement will in practice need the agreement of all EU member states the UK has an opportunity to go over the fine print and ensure that it will not adversely impact on the City. Given the importance of the UK’s financial services industry it needs to make sure its voice is heard.
Christopher Howarth is senior political analyst for Open Europe.