Brussels European Summit: France and Germany Divided

European Parliament (back), where the Budget Summit is Taking Place. Brussels, Belgium
Photo: Olga Symeonoglou

French and German governments have expressed their disagreement this week as members of the Euro Zone meet to discuss the project of a European Banking Union at the European summit, taking place October 18th and 19th. Angela Merkel said she was in favor of a step-by-step integration, whereas her French colleague said he wanted to work as quickly as possible on the project.

The idea is to abandon the mere coordination of each member state’s National Central Bank for European supervision assured by a common authority. Such supervision would be the first step towards a Banking Union, the aim of which would be to establish common banking rules across the EU. A new regulatory body may be created or, more probably, the mission will be entrusted to the European Central Bank – head of the European System of Central Banks. Already the source of monetary policies and in charge of money issuance in the Union, a supervisory role would give the ECB even greater power.

In principle, France and Germany concur, but not when it comes to the degree of integration to put in place. The European Commission and France want to integrate the 6,000 banks of the Euro Zone, but Germany prefers to limit integration to the largest establishments. The project would be implemented progressively and be effective on the January 1, 2013 for the banks which benefited from public funds. The bigger institutions would be integrated in 2014.

This is in the interest of Germany. Indeed, the German economy relies heavily on a regional banking system. Regional banks, local collectivities, and local firms are closely linked. This proximity has been pointed out at the European level, but Germany did not change anything. Moreover, some of these institutions are said to be in a delicate financial situation. Putting in place a full integration would allowed the European Central Bank to have a certain amount of control over the German system.

Another source of disagreement is the European Mechanism of Stability (EMS) – a bailout fund – put in place by the European Council in June, after Germany gave its approval under the condition of a European banking supervision. The EMS allows a direct recapitalization of banks without having to resort to state intervention through capital markets.

Other issues will also be discussed at the summit, such as the question of a central budget for the Euro Zone (different from the EMS, which only intervenes in the event of a crisis). The pooling of debts would take the form of a sinking fund or Euro-bonds (even if the President of the UE, Herman Van Rompuy, refused to use this term). This is not to the taste of Germany and Austria, who advocate for a budgetary integration, contrary to France and Italy.

Many questions need to be addressed during these discussions, in particular the supervision of EU bank branches located outside the EU and the representation of the ECB within the European Banking Authority. The European Banking Authority is charged with safeguarding financial stability or market transparency since 2011. But, as Angela Merkel emphasized, the aim here is to prepare for the next summit to be held in December, not to make a final decision.

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  1. […] reached a compromise last Thursday night in Brussels about the concept of a Banking Union, despite disagreements between France and Germany. It was decided that a Banking Union would be created for the 6,000 […]

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