Europe moved a step closer to a banking union yesterday with a plan for the European Central Bank (ECB) to police banks, a cornerstone of the closer fiscal integration designed to end years of financial and economic turmoil in the region.
European Commission President Jose Manuel Barroso outlined the proposal in his annual “state of the union” address, laying out a path to further economic and fiscal integration to underpin the future of the euro.
“The crisis has shown that while banks became transnational, rules and oversight remained national,” Barroso told members of the European Parliament. “We need to move to common supervisory decisions, namely within the euro area. The single supervisory mechanism proposed today will create a reinforced architecture, with a core role for the European Central Bank ... It will be a supervision for all Euro area banks.”
The proposed banking reforms, which need to be approved by EU member states, aim to break the link between heavily indebted countries and their struggling banks, tackling a core element of the debt crisis that has afflicted Europe since early 2010.
For the plan to work, it will require countries to surrender a degree of sovereignty over supervising their banks. This has long been a national responsibility, and the proposal has already led to tensions with Germany and Britain.
A banking union foresees three steps: The ECB gets the power to monitor all eurozone banks and others in the wider EU that agree to the oversight; the establishment of a fund to close troubled banks; and a fully fledged scheme to protect citizens’ deposits across the eurozone.
“The challenge is gigantic,” said Nicolas Veron, an expert in EU financial policy with think tank Bruegel. “It’s not just banking union. Banking reform is part of a broader agenda of integration that has been made more pressing by the crisis.”
Handing powers of supervision to the ECB also unlocks the possibility of direct aid to banks from the eurozone’s permanent rescue scheme, the European Stability Mechanism (ESM), although it is not clear when Spain and others would benefit.
Under the terms of the proposal, the ECB would be at the head of the current fragmented system of national regulators, with the power to police, penalize and even close banks across the eurozone.
The ECB would also gain powers to monitor banks’ liquidity closely and require them to keep more capital to protect themselves against future losses.
Reaching agreement on the terms of the union could be complicated, delaying the introduction of the new regime beyond the target set by eurozone leaders of the beginning of next year.
In his speech, Barroso also called for the EU to be turned into a “federation of nation states” in a sweeping demand for countries to surrender more sovereignty and move toward full integration.
Barroso said he was not calling for a European “superstate,” but said the EU would always be less than the sum of its parts unless the union was deepened.
“Let’s not be afraid of the words: We will need to move towards a federation of nation states. This is our political horizon. This is what must guide our work in the years to come,” he said in his annual “state of the union” address. “A democratic federation of nation states that can tackle our common problems, through the sharing of sovereignty in a way that each country and its citizens are better equipped to control their own destiny.”