From a banking perspective alone, the European Union (EU) makes for a fascinating study from just about every angle—enormous potential tempered with serious obstacles, incredible diversity balanced with a need for core unity. Case in point: The announcement this week that EU leaders want agreement by the end of the year on a way to resolve failed banks at a continent-wide rather than a national level.
No one questions the need for faster and more comprehensive resolution of such crises, which seem to occur with distressing regularity. As covered often on this blog, the inter-connected nature of the modern global economy means that a minor cold even in Slovenia can make everyone sneeze. And of course, the longer each bank failure drags on, the harder it is to extricate from the system, even though the solution put in place invariably leaves some parties unhappy. As a result, it’s imperative to develop a smoother crisis management mechanism.
That said, the evident disparity in the union ensures that there are always hurdles in the way. The newest attempt—which moves the EU closer to putting some boundaries around taxpayer-funded bailouts that invariably upset the public at large, not to mention their elected representatives—is no exception.
For the record, the law simply outlines common rules for authorities in the 27-nation bloc to follow when dealing with their own banks. In other words, it does not take on the far more contentious issue of sharing power, or the costs run up by the act of rescuing banks at the EU level. Still to come: The creation of a central EU body to deal with failing banks, particularly multinationals.
However, some steep hurdles are evident already, such as the upcoming elections in Germany. Current German Chancellor Angela Merkel (there are elections coming) has already voiced concern with the accelerated timetable, and that isn’t even the biggest problem. A European authority with broad powers of the kind needed would potentially force major changes to the EU treaty, and that certainly won’t happen anytime soon. On a more conciliatory note, France is pushing for as much progress as possible under existing treaties, though it’s not ruling out the amendments option.
However, for a glimpse into the cultural gaps that must be overcome, consider the reaction in Ireland to recent events in this area. In recordings published this week from conversations in 2008, Irish banking executives are heard mocking their German counterparts for deposits made with government guarantees. Irish politicians now seeking financial help of their own to prevent a system crash are having to deal with the fallout.
Meanwhile across the pond, Britain cannot stay insulated from the problems. The government this week moved closer to its stated goal of disinvestment in the Royal Bank of Scotland by asking financial institutions to acquire its stake in UK Financial Investments, which manages the government’s assets. There were previously major bailouts here as well.
At the heart of this debate is a central question in search of an answer: Should there even be a central mechanism for bailing out troubled banks? As industry observers and commentators have pointed out, isn’t this how the ‘too-big-to-fail’ fiasco got started?
Again, there are no easy or automatic solutions here. The undeniable reality, however, is that with a complex and inter-connected financial ecosystem, a single bad link can disrupt the entire chain. In other words, a philosophical preference for a free-market system won’t ward off bad news for everyone.