This time last year many economic analysts were asserting that the future of the euro was by no means certain and that a breakup of the euro area was no longer a theoretical possibility. Since then, a certain degree of calm has returned to the market mainly as a result of the declaration by Mario Draghi, the ECB president, who promised “to do what it takes” to ensure stability in the sovereign debt market.

The governance structure underpinning the euro remains weak

European political leaders went a step further and committed themselves to introduce a banking union that would, among other things, make the ECB responsible for the supervision of most banks in the EU. This move, like others before it, was initially welcomed as the silver bullet that would decouple troubled banks from debt-burdened governments (e.g. Greece), and prevent banking problems from spreading to sovereigns (e.g. Ireland and Cyprus).

After months of deep analysis on the implications of this move, there is some concern in both small and large countries in the euro area. One of the major changes that a banking union would bring about is the concept of ‘a single rule book’ – a common set of banking rules administered by the ECB to ensure that all banks in the EU would compete and operate in a level playing field.

The idea of a single rule book was first put forward in the early 2000s by the late Italian economist Tommasso Padoa-Schioppa. He envisaged a single rule book with technical rules that would be adopted through EU regulations, so that they would be directly applicable to all financial institutions operating in the Single Market. The Capital Requirements Directive, in fact, aims at implementing the Basel III regulations on the capital adequacy and liquidity of financial institutions.

The main concern relating to this single rule book is the risk of adopting a ‘one size fits all’ approach to ensure adherence to the Capital Requirements Directive. The challenge for the larger Maltese banks is not so much related to whether they will be in a position to reach the minimum capital levels, but to the administrative burdens that it will impose. Major investment in human and IT resources is inevitable if smaller banks are treated in the same way as much larger ones.

Another issue that is linked to the banking union is the introduction of a common system for deposit guarantees. Apart from the concern expressed by Germany about the possibility of German taxpayers having to finance the bailout of weak banks especially in the Mediterranean area, smaller countries like Malta have similar concerns even if they come from a different perspective.

Maltese banks have traditionally adopted conservative banking practice. So local regulators would be justified in asking what guarantees the ECB will give to Maltese taxpayers that their contribution to the common deposit guarantee system will not be supporting banks in countries where banking practices are less prudent.

One major advantage of the banking union will be the credibility that it gives to the supervision of banks in smaller countries. While our local regulators have carried out their duties consistently well in the last several decades, international media speculation can often destroy the hard work of both regulators and financial services operators in a small country like Malta.

The way that Malta was so unfairly linked with Cyprus on the pretext that our business models were similar is a clear example of how the international financial media can cause upheaval in a local small economy. The certification of good governance of our banks by the ECB would help to combat misconceptions created by speculative international journalists.

Even if the introduction of the banking union is still not a certainty, one hopes that the European Commission will come up, as promised, with more concrete proposals by the end of June on how this union will work. Hopefully, once the German general elections are behind us after next September, Germany will once again take the lead in hammering out a solid implementation plan for the banking union.

I do not believe, however, that this will necessarily mean the end of the problems for the euro. The governance structure underpinning the euro remains weak. In the past five years, EU political leaders adopted a gradual approach to reform that has not restored the confidence of financial markets in the common currency.

Is fiscal union the next step on the road to saving the euro?

johncassarwhite@yahoo.com