The quest for a new nexus

The national bank-state nexus is over. For this reason, it could be argued that the European financial crisis took its full-blown dimension because, in 2008, the European leaders decided that national governments should be totally responsible for the survival of their own respective banking systems.

... we cannot continue talking of national governments being totally in control of their own destiny..- Stefan Gauci Sultana

In reality, such policy decision would have succeeded only if banking systems in the EU remained national in their own nature. But this has not been the case, especially since the early 2000s, when the biggest financial sector mergers and acquisitions in the EU have been taking place beyond national borders. Plus, loans in wholesale banking experienced the same fate.

In return for this policy decision, national governments like Spain, Greece and Ireland could not even save their own bank systems because of their dependency on “foreign” funding. Today’s policy moves towards the creation of a banking union within the EU are confirming the changing nature of banking systems within the EU financial market.

In plain words, what does a banking union mean? It means that banks in any EU country could operate anywhere in the EU, while their assets and liabilities would eventually become European. This means that, for example, a Maltese bank would continue to operate in Malta but, then, its assets and liabilities would be directly immersed into a European banking system.

For this to happen, there should be the creation of several common EU structures and regulations. One of them is the establishing of common capital requirements and the further centralisation of financial supervision. This is not the case now. In fact, the foreseeable situation envisions a situation whereby member states could vary their capital requirements up to five percentage points, both in terms of the definitions of capital and also in terms of numbers. Moreover, the EU financial supervisory structure is quite limited in terms of manpower, scope and also financial resources.

Another pillar for a banking union to succeed is the creation of a common deposit guarantee system (DGS).

DGSs are only in existence at the national level and these are basically aimed at guaranteeing depositors of their own money, especially in cases of banking failures. As a result, such a new EU system would have to be supported by large sums of money of the core European countries. And this is not easy to achieve, especially in these uncertain times.

Last but not least, common EU funds for the recapitalisation of banks should also be in place. For this to succeed, the European Stability Mechanism should have to be allowed to undertake such initiatives directly to banks and, therefore, bypassing national governments.

All these changes in the European governance structures are aimed at stabilising the EU through further centralisation. Academics like Jeffrey Sachs and Financial Times commentators like Gavyn Davies all argue in favour of such a banking union in order to create more policy mechanisms that could absorb shocks due to the limitations of national governments to deal with their own debts.

The traditional nexus between national governments and national banks has reached its limits in the EU. Today, we cannot continue talking of national governments being totally in control of their own destiny, their own assets and debts. Today, European governments, except in certain exceptional cases, all depend on a high degree of foreign funding and, thus, this situation makes them very vulnerable to external shocks that could be reduced by the creation of a banking union.

The changes undertaken within the EU, especially since the first Greek bailout in May 2010, have been numerous and very significant, even though not well communicated. Albeit the initial slow pace in EU decision-making, who could imagine the creation of several financial sector regulations and supervisory governance structures like the European Systemic Risk Board, the creation of the European Financial Stability Facility and the European Stability Mechanism and also the big strides towards more fiscal and economic discipline through the European Commission’s new powers and the Six Pack?

And the list is likely to increase in the short and the medium term, mostly through more effective surveillance of competitiveness and macro economic imbalances, stronger enforcement powers, common taxation and also more efficient decision-making capacity.

Only the other day, German Finance Minister Wolfgang Shauble stated clearly that the ultimate objective for the EU should be to become a true political union. Moreover, in her meeting with Prime Minister David Cameron, German Chancellor Angela Merkel reiterated the fact that a two-speed Europe could be the way forward. This means that eurozone members, like Malta, should become more integrated than their non-eurozone partners.

I agree with the latter statements.

However, I believe that the Germans and the other northern European countries should demonstrate more leadership and political will to engage with all the peoples of Europe to create a clearer strategy on how to achieve such political objective. So far, the strategy, if any, seems very unclear and therefore, it is creating lots of uncertainties.

For the EU to succeed, we cannot continue talking only of a fully developed monetary union, with the European Central Bank taking the brunt on its independence credentials. All other governing elements should be advanced to the same extent in order to have a fully developed financial, fiscal, economic, monetary, political and social union, what I term as an FFEMPS Union.

The creation of this sort of Union could eventually create a European people, a European Demos. However, for this to happen, such power centralisation at the EU level should be supported simultaneously by the strengthening of democratic mechanisms at different levels – the European, the states and the regional levels, all targeted towards the legitimising of different points of power.

The traditional nexus between national governments and banks is dead. We will have to live with a new nexus – that of a European government with European banks. The implications are significant but first they have to be explained and discussed.

This article was written before the latest moves by Brussels towards A “European Federation”.

The author is lecturer in public administration at the University of Malta.