Has Europe rediscovered its mojo?
- 14 December 2012
- From the section Business
Finally, the European leaders gathered in Brussels can actually relax a little.
For the first time in months, the financial markets do not hang over their summit deliberations like the Sword of Damocles.
But although the pressure of imminent financial apocalypse may have subsided since the summer, the new "banking union" that has just been agreed is very much a child of the crisis.
Yet it is also more than that. The banking union represents the first step on what may prove to be a new and decisive leg in Europe's post-War journey towards ever-closer union.
How did this come about?
The financial crisis exposed the parlous state of many eurozone banks - particularly in Spain and the Republic of Ireland, where loans to property developers and home-buyers helped fuel property bubbles in the last decade that have now burst.
Unfortunately, the financial crisis also exposed another painful reality - that it is possible for a eurozone government to literally run out of the money it needs to pay its bills.
This is because no eurozone government controls its own money supply. The eurozone's money supply is instead controlled by the European Central Bank (ECB), whose rules ban it from bailing out governments.
The cost to Ireland of rescuing its banks was so great that the Dublin government then had to seek a bailout of its own from other European governments and the International Monetary Fund.
A bailout of Spain's banks has also been lined up by the eurozone. But it is guaranteed by the Spanish government, and - just as with Dublin - there are fears that Madrid may simply not be able to afford the full cost of saving its own banks.
The problems did not end there. Other eurozone governments - Greece, Italy and Portugal - already had excessive debts. And that undermined confidence in their banks as well.
That is because the banks are big lenders to their own governments, and because investors normally assume a bank is only as strong as the government that stands behind it.
In other words, the heavily indebted countries of southern Europe faced a vicious circle of unhealthy banks and unhealthy government finances, unable to support each other or their economies.
The consequences of this vicious circle became hair-raisingly apparent in December 2011, when big investors and banks pulled their money out of Spanish and Italian (and even French) banks, moving it to the relative safety of German (and Swiss and Danish) banks.
The panic threatened to become self-fulfilling, leading to a Lehmanesque meltdown, until the ECB stepped in with emergency loans to tide the beleaguered banks over for the next three years.
But the basic problem of a vicious circle between banks and their governments has not gone away. So the banking union is intended to solve it.
It will ultimately do so by getting every eurozone government to write a cheque, underwriting the risk of something going wrong at the banks in another eurozone country.
So, if Italy's banks get into trouble in the future, German taxpayers can be called upon to share the burden of rescuing them (and vice versa, of course).
This pooling of government money is a major step towards making the eurozone function more like a single country, with a single public purse, and less like a disparate set of countries stranded in a common currency area.
Naturally, no eurozone government is willing to write a cheque for its neighbours without reassurances - least of all Germany, who currently finds itself footing most of the bill for saving the eurozone.
And this is where the European Central Bank in its new role as banking uber-supervisor, along with a yet-to-leave-the-drawing-board "resolution authority", comes in.
These two will act as impartial referees. The ECB will make sure that eurozone banks enjoying taxpayers' largesse do not take reckless risks.
And when banks inevitably do get into trouble, the resolution authority will make sure the cost of rescuing them is kept to a minimum.
Picking up the bill
German readers may be keen to know just how much of their money could ultimately be called upon in this way.
It is a good question, and one that will probably not have a proper answer until the next big crisis comes.
In principle, there are two bills that taxpayers may have to pick up.
Firstly, if the ECB deems it necessary to rescue a bank, eurozone governments will collectively invest in buying new shares - or "capital" - in that bank. That investment is at risk if the bank continues to make losses, and especially if it then goes bust.
Secondly, when banks get into trouble, all European national governments currently guarantee their respective citizens that up to 100,000 euros in their bank account will be protected. The idea is to turn those national guarantees into a single pan-European one.
To make this more palatable for taxpayers, the banks themselves, and their investors, will be made to eat most of the costs if one of them comes unstuck.
All eurozone banks will be required to contribute during the good years to two pots of money - one for bank rescues, one for deposit guarantees - that can be drawn on in the less good years.
And when a bank has to be rescued, its existing shareholders and lenders will be made to lose much of their investments.
This approach was taken with the recent bailout of Spain's banks, and proved contentious as many of the losers were ordinary Spanish citizens who had naively invested their life savings in their bank's special "preference shares".
No blank cheque?
However, take a step back from this nitty-gritty, because there is an important overarching principle that has not yet been resolved.
In a major banking crisis - including the one that is still unfolding - will eurozone governments ultimately write each other a blank cheque?
What made financial markets panic last winter was the idea that countries like Italy and Spain were ultimately on their own.
The only way to permanently dispel such fears would be for the wealthier eurozone countries - currently Germany - to make clear that in the worst case scenario they will be there to share the burden, whatever the cost.
And that does not just include the cost of rescuing banks - but also all the other costs that the governments of the heavily depressed southern European economies currently face, such as a jump in unemployment benefit payments and a collapse in tax revenues.
If the answer is no, it means those troubled southern governments could still potentially run out of money - or simply leave the euro.
And so long as that possibility lingers, it could still reinstil panic in the markets.
All of which makes it somewhat worrying that Germany remains so reticent about providing a blank cheque to the banking union.
Germany has sought to limit its financial commitment to the banking union to the amount it has already invested in the eurozone bailout fund.
More worryingly, it seems Germany has blocked any sharing of the burden of the existing bailouts of Irish and Spanish banks. Dublin and Madrid remain on their own.
To some extent, German Chancellor Angela Merkel's hands are tied. Germany's constitutional court has made clear that the government may not donate any more money to common European weal without first passing a constitutional amendment, which would involve a referendum.
But there is a lot more to the German perspective than mere tight-fistedness. Berlin is using this crisis to relaunch the European project.
The banking union is just one part of a plan, drawn up by the EU's bigwigs, that will eventually lead to the creation of a "fiscal union" - the direct transfer of money from taxpayers in one part of the EU to help citizens in another, much as happens within any nation state.
That sounds very much like the blank cheque that markets would like to see.
What is more, the europhile German Foreign Minister, Guido Westerwelle, and 10 of his European peers have drawn up a plan for a full-blown political union, including a common military.
So why the reticence?
The German viewpoint can be summed up as: "No taxation without representation". They will seek a grand bargain with Europe.
Germany will not open the floodgates to its taxpayers' money until eurozone governments have agreed to fully submit to a central authority in Brussels.
This does not just mean the ECB or the resolution authority. It also means submitting to the European Commission on matters of government spending and economic policy.
What's more, none of this can happen without the public's consent - by way of that referendum in Germany (and presumably other eurozone members), and by making Brussels a lot more democratically accountable.
But will the European public give their consent?
Polls suggest that German voters remain committed to the European project. Meanwhile, voters in southern Europe might reasonably see their own salvation in what would amount to a historic act of generosity by Germany.
The sticking point may be France - a country still very much wedded to its nation statehood. Might the crisis need to engulf Paris before a bargain can be struck?
An interesting test of the public mood will come in 2014 with the European elections, which - under the Lisbon Treaty - will for the first time be considered by European leaders when choosing the next president of the European Commission.
European parties will start choosing their candidates from this summer.
If people get to pick an identifiable European leader, at a time when a European issue - the eurozone crisis - is at the top of most voters' agendas, they might just perhaps be motivated to overcome their usual euro-apathy and go out and vote.
But who will they elect?