The Road to Shared Liability Hidden Risks Plague Euro-Zone Bank Oversight Plan

German Chancellor Angela Merkel was full of praise for the euro-zone bank oversight plan passed last week at the EU summit in Brussels. But the deal is not nearly as watertight as she claimed. It lacks a legal foundation and could lead to a conflict of interest at the highest levels of the European Central Bank.

A display showing various press conferences underway at the end of last week's EU summit in Brussels.

A display showing various press conferences underway at the end of last week's EU summit in Brussels.


Angela Merkel received recognition from the highest possible level -- herself. The most recent resolutions made by the European Union in its ongoing effort to save the common currency, she said last Thursday, "can't be spoken of highly enough." Her administration had been able to "push through Germany's core demands," she said.

Self praise, of course, is often inaccurate. But in this case, the gap between fiction and reality is particularly wide. The agreement reached by European leaders and their finance ministers during last week's summits in Brussels could ultimately destroy Merkel's reputation as a level-headed and firm savior of the common currency.

Her strategy in the crisis has long been praised for being one focused on a series of systematic small steps. The results of last week's negotiations, however, can best be described as large steps backwards.

Merkel has tirelessly called for EU leaders to push forward with the political integration of Europe. But at the most recent EU summit, she personally ensured that plans to that effect, created by European Council President Herman Van Rompuy, didn't even make it onto the agenda. At the same time, German Foreign Minister Wolfgang Schäuble voted in favor of a new banking supervisory agency under the authority of the European Central Bank.

It is a plan that Germany's own central bankers view with concern. Lawyers at the Bundesbank object that the responsibilities of the new super-agency remain nebulous. The project has no "lasting, sustainable legal foundation," they say.

The German Vision

No longer is "more Europe" the focus of EU efforts. Instead, German taxpayers could be made liable for billions in risk taken on by large European financial institutions. There is little left of Merkel's motto calling for "increased liability only in the case of increased integration."

Merkel's administration had sought to push through its own vision of a banking union. To prevent a situation whereby struggling lenders in Spain or Ireland could easily access German tax revenues, large countries such as Germany were to have a greater role in the future banking watchdog. Schäuble also wanted to see the new agency strictly separated from the ECB Governing Council. He wanted to ensure that, in propping up ailing banks, the ECB didn't succumb to a conflict of interest with its true mission -- that of maintaining price stability. Schäuble demanded nothing less than a "Great Wall of China." No Governing Council member, he said, should be involved in the supervisory agency and that agency must be the final authority.

That is not what emerged from last week's summits, though. According to the agreement, the new oversight agency must submit all of its important decisions for authorization. In the case of conflicts, the agency must also submit to the decision of a mediation committee -- a provision which, according to German central bankers, is not sufficiently grounded in European law.

Could a situation arise in which the ECB Governing Council has the final word over the oversight agency's work, then? German central bank lawyers say that it can't be ruled out. And that would represent a significant failure for Schäuble and his negotiating team.

Not Enough Legal Protections

Furthermore, the personnel of the ECB council and the future banking oversight agency could overlap to a degree that Berlin had been hoping to avoid. Euro-zone member states cannot be prevented from nominating members of the ECB council to serve on the new mediation committee.

First and foremost, however, Merkel was unsuccessful in ensuring that larger euro-zone members have more influence in the oversight agency. As has been the case thus far in the ECB, a vote from Malta counts just as much as a vote from Germany. It is a situation that makes in possible for expensive bailout packages for Irish or Spanish banks to be pushed through despite German opposition.

The deal marks just the latest milestone on the road to joint liability in the euro zone -- and the danger of a collapse has still not been precluded. Europe's economic crisis, say experts, will only continue to get worse next year.

No wonder, then, that financially powerful countries outside the euro zone are less than impressed by the new banking watchdog. The oversight regime is open to non-euro-zone EU members as well, but Sweden, for example, isn't even considering it. The risk, says Finance Minister Anders Borg, is simply too great. "We don't believe it contains enough legal protection for taxpayers," he says, "so that they won't be made liable for mistakes made by foreign banks."


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