Combating the Crisis: Berlin and EU Weigh Greater Bank Oversight

Chancellor Merkel and European Commission President Barroso on Monday met to talk about creating a banking union to increase oversight over systemically important European banks. The move could mark a step toward providing direct aid from Brussels to ailing EU financial institutions.

Merkel and Barroso chat at the Chancellery on Monday. Zoom
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Merkel and Barroso chat at the Chancellery on Monday.

Every time the euro crisis begins to intensify, a new idea for solving it seems to start bouncing around European capitals. This week, talk is focused on the concept of creating a European banking authority to keep watch on those financial institutions that are too big to fail.

And with Chancellor Angela Merkel and European Commission President Jose Manuel Barroso having discussed the idea over veal cutlets and white asparagus in Berlin on Monday, it seems likely that it will figure prominently on the agenda of the European Union summit scheduled for later this month.

"We will also talk about the extent to which we have to put systemically important banks under a specifically European oversight so that national interests don't play too large of a role," Merkel said prior to her working dinner. "Those are mid-term goals."

The German chancellor also said that the European fiscal pact, which she foisted upon the EU in early March in order to improve budgetary discipline across the bloc, is just one step toward further euro-zone integration. "We need more Europe in the euro zone, not less Europe," she said.

The idea of a European banking union was floated last week by the European Commission as a way of ultimately clearing the way for using European funds to directly bail out needy banks on the Continent. Germany has opposed such direct bailouts thus far due to the absence of an EU oversight mechanism. Barroso has said that a "banking union with more integrated financial supervision" was an important step toward complementing Europe's existing monetary union with an economic union.

'Whatever Is Necessary'

Barroso also added that European deposit guarantees should also be a part of the discussion, a proposal broached last week by both the European Central Bank and the European Commission. He said that Europe must do "whatever is necessary to ensure the stability of our currency."

It is no accident that Merkel and Barroso are broaching the subject now. Concern has been growing recently in Europe and, indeed, across the globe, that Spain might be the next euro-zone nation to require a significant bailout. Madrid's biggest problem is its banks, with the country reportedly needing to inject €19 billion into Bankia S.A., one of Spain's largest lenders. A lack of clarity regarding where that money might come from, however, has driven up Spain's long-term borrowing costs toward the danger zone of 7 percent.

German Finance Minister Wolfgang Schäuble also indicated on Tuesday that he supports the idea of a banking union. In a long interview with the financial daily Handelsblatt, he said that "we should pursue a step-by-step approach toward a banking union of the kind proposed by Commission President Jose Manuel Barroso." Schäuble also repeated Germany's opposition to euro-bonds in the interview. "We have to pursue greater integration," Schäuble said.

'More Steps Need to Be Taken'

Still, despite Berlin's willingness to look at the banking union idea, it seems likely that many in Germany will voice skepticism of the plan. Germans are already growing weary of being asked to finance the survival of the euro zone, and any indication that German money could be used to bailout foreign banks is not likely to be popular. Furthermore, German banking associations late last week indicated their opposition to the kind of deposit guarantee proposed by the European Commission. "In view of the current state of the financial sector in some euro-zone states, (a deposit guarantee) would lead to a spreading of risks to the detriment of the German financial institutions," reads a joint statement released by banking groups representing private-sector institutions.

In addition to a banking union, however, Europe is focusing an increasing amount of attention on efforts to boost economic growth across the Continent amid floundering economic data and persistently high unemployment. On Tuesday, finance ministers from G-7 nations will conduct an emergency conference call to discuss the problems currently facing the euro zone. Despite the small steps already taken toward greater fiscal integration, many countries outside of Europe are concerned that not enough is being done.

"Markets remain skeptical that the measures taken thus far are sufficient to secure the recovery in Europe and remove the risk that the crisis will deepen," White House spokesman Jay Carney said on Monday. "So we obviously believe that more steps need to be taken."

cgh -- with wire reports

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