Just Hold On a Minute, Chaps…
As the centralizers rush headlong toward establishing the European super-state that no-one except the political and bureaucratic elites actually wants, another small 'legal obstacle' has reared its head. This seems highly likely to be yet another test case for one of our pet theories: laws that are designed to hold Leviathan in check are immaterial to the eurocracy. They will simply be reinterpreted to fit the agenda of the day (examples for this abound – most recently the ECB has proven to be a master at reinterpreting its mandate to include all sorts of 'duties' that are not listed in black and white anywhere in the regulations supposed to be governing it).
In fact, this principle can be extended to governments everywhere: it matters not if they are nominally 'democratic' – they all feel perfectly free to ignore the law at will when real or imagined 'emergencies' are held to demand 'action' – but they will certainly not shy away from throwing the book at opponents (more on this point in a subsequent post).
Anyway, the problem is that the legal counsel of the eurocracy has determined that the planned banking union is in violation of the EU treaties. As reported in the FT (the link leads to the pay-wall free CNBC version) it has issued a 'secret' legal opinion to this effect. This immediately raises the question: why the secrecy?
“A plan to create a single euro zone banking supervisor is illegal, according to a secret legal opinion for EU finance ministers that deals a further blow to a reform deemed vital to solving the bloc’s debt crisis.
A paper from the EU Council’s top legal adviser, obtained by the Financial Times, argues the plan goes “beyond the powers” permitted under law to change governance rules at the European Central Bank.
The legal service concludes that without altering EU treaties it would be impossible to give a bank supervision board within the ECB any formal decision-making powers as suggested in the blueprint drawn up by the European Commission.
Those non-euro zone countries that want to opt into the bank supervision regime would also be legally unable to vote on any ECB decisions — a key demand of countries such as Sweden and Poland.
While it is common for lawyers from different EU institutions to disagree on aspects of proposals, diplomats involved in the talks said the sharp difference in legal opinion would complicate efforts to overcome the deep-set concerns of some member states. Banking union will be a central topic at the EU leaders summit on Thursday.
In addition to spelling out the legal limitations facing euro zone “outs”, the adviser’s opinion will add to German concerns over the independence of the ECB monetary arm, as it casts doubt over establishing a separate decision-making process for supervision.
Berlin’s demand for more voting clout on supervision matters is also undermined. The legal opinion will add to German reticence over rapid implementation of the supervisor.”
While EU leaders are still aiming to agree the supervision plan by the end of the year, talks have made little progress to date, in part because of strong German objections. Some participants privately suggest the talks may drag on for a year or more.
Other elements of the commission proposal were also challenged in the legal opinion, notably in asserting the rights of member states to decide how rules on their banks are applied, even when under the supervision of the ECB.
“The major question that follows from this opinion is a practical one,” said Alexandria Carr, a former UK legal adviser now at Mayer Brown International.
“Will the ECB have the capability and capacity to be the ultimate decision maker in respect of all supervisory decisions over complex, global institutions and to apply at least 17 different pieces of domestic legislation?”
It might be argued then that it is merely a question of altering the treaties then – but that isn't so easy, as it would require ratification by the member countries' national parliaments. As we have seen again and again, democratic processes are usually a severe stumbling block to further centralization – because politicians know very well that their constituents are against it. Consequently the eurocrats have developed a tendency to sidestep such processes if possible (in addition when this is thought to be opportune – as euro-group chairman Mr. Juncker has once confirmed, he considers lying to be part of his legitimate crisis fighting arsenal).
In any case, the latest euro area summit has pushed on with the banking union agenda regardless of the legal stumbling blocks. Ahead of the summit, the financial press opined that “no substantial decisions are expected”, which would of course be perfectly in keeping with the tradition of EU summits, but today the tone has changed somewhat, as reportedly 'great strides' toward establishing the banking union have been made (presumably though the 'secret legal opinion' has not changed overnight).
“European Council President Herman Van Rompuy said the 27 leaders agreed at a Brussels summit to adopt a legal framework by the end of this year giving the European Central Bank overall responsibility for banking supervision.
"Once this is agreed, the single supervisory mechanism could probably be effectively operational in the course of 2013," he told a news conference after nearly 10 hours of talks.
French and EU officials said all 6,000 banks in the single currency area would gradually come under ECB supervision by 2014, starting with banks receiving state aid, then large cross-border institutions. Most day-to-day oversight would be delegated to national bodies.
Creating an effective banking union, for which this deal was a first step, is regarded by the International Monetary Fund and market economists as a key component in overcoming the euro zone's three-year-old debt crisis.
French President Francois Hollande said the leaders did not discuss possible financial assistance for Spain, but he laid out a series of steps that could turn a corner in the crisis.
"Tonight, I have the confirmation that the worst is behind us," he told a 3 a.m. news conference. "We are on track to solve the problems that for too long have been paralyzing the euro zone and made it vulnerable.
"If the December European summit confirms the decisions we took, if Greece finds a lasting solution, if Spain recovers funding mechanisms, then we will be done with a situation which weighed on markets and on the confidence in the euro zone."
Those seem to be way too many 'ifs' to be able to crow about 'confirmation that the worst is behind us' – especially considering that in the background, albeit currently ignored by the financial markets, a number of rather pertinent data continue to get worse.
Anyway, not a word was breathed about the above mentioned legal opinion, which apparently is set to remain 'secret'. The Reuters report on the summit also points out that the outcome on the surface appears to be a defeat for German finance minister Schäuble, who remains intensely skeptical about the banking union, and for good reason, as we have pointed out on several previous occasions. Banking nationalism plays an important role as well – governments are naturally not eager to give up control. This is in addition to the reluctance of some to underwrite the risks of what are currently not banking systems in the periphery, but rather banking carrion kept on artificial life support by large dollops of ECB re-animator sauce.
“Doctor Gruber, Doctor Gruber! Wie geht es dir?” – ”He's not dead….I gave him life!”
(Image source: unknown, The Web)
“German Chancellor Angela Merkel said it would take more than a couple of months before the supervisor was fully effective and direct bank recapitalization could be considered.
However, the agreement appeared to be a defeat for German Finance Minister Wolfgang Schaeuble's efforts to delay and limit the scope of European banking supervision. Germany has been reluctant to see its politically sensitive savings and cooperative banks come under outside supervision. It rejects any joint deposit guarantee under which richer countries might have to underwrite banks in poorer states.
The deal came after the leaders of France and Germany, Europe's central powers, held a private meeting after clashing in public over greater EU control of national budgets.
The point when the ECB will effectively become the bloc's banking supervisor is important because it would open the way for the euro zone's bailout fund to inject capital directly into troubled banks, without adding to their host governments' debts.
A French government source said the European Stability Mechanism (ESM) could start recapitalizing troubled banks as early as the first quarter of 2013, but a German source said it was "very unlikely" to happen so soon.
Merkel earlier demanded stronger authority for the executive European Commission to veto national budgets that breach EU rules. She said a December EU summit would take decisions on these issues of closer euro zone economic governance.
For once, the summit was not under intense pressure from financial markets, which have calmed since the ECB pledged last month to intervene decisively if needed to buy bonds of troubled euro zone states to preserve the euro.”
So the 'great strides' appear to have been a bit smaller than advertised. If the Germans say that something is 'unlikely to happen soon', then that is probably the information that is pertinent, rather than Herman 'Damp Rag' van Rumpoy's and Francois Hollande's enthusiastic pronouncements. Those seem to mainly reflect wishful thinking. France is of course very interested in getting a 'joint deposit insurance' system off the ground, as its banks hold the by far biggest concentration of foreign exposure to the 'PIIGS' on the planet.
Indeed, one wonders what the eurocracy could hope to gain from a 'banking union' that does not sport such a deposit guarantee scheme. After all, the intention behind the entire push for a banking union is to sever the risk nexus between banks and their sovereigns.
Don't get us wrong here – as far as we are concerned, we are opposed to any form of government-underwritten 'deposit insurance' scheme, regardless of whether it is on the national or supra-national level. Deposit insurance has been one of the major pillars of the reckless credit expansion that has brought us to the current juncture. Prior to the advent of such schemes, banks had to be more circumspect about extending credit, as bank runs were always a very real possibility for overextended banks. Depositors at the same time had good reason to be suspicious and be very careful about who they entrusted their money to.
In a free market setting, even in the event that not all banks were keeping a 100% reserve for demand deposits, credit booms would not expand to the same extent they have under the current dispensation. It is the fact that commercial banks are backstopped by central banks and governments that has allowed the credit booms we have witnessed to attain such egregious proportions. The banking union as envisaged by the EU would create an even bigger incentive for banks and depositors to throw caution to the wind, as it would provide an even heftier backstop.
Missing the Point
It remains our contention that apart from a few exceptions, the 'crisis management' effort the EU is engaged in continues to miss the decisive point. The exceptions consist mainly of the realization that sclerotic and stifling labor market regulations have to be rescinded in the crisis countries and replaced with more flexible schemes, as well as the suspension of a lot of 'pork' type politically inspired spending. As far as this point is concerned, we agree with J.H. de Soto that the euro has forced a number of governments to adopt urgently needed reforms they would have skirted otherwise.
However, the most fundamental problem of the euro area that has come to the fore is that domestic banking systems were able to engage in willy-nilly credit expansion via fractional reserve banking under cover of the 'safety' allegedly provided by exchange rate stability. In fact, the case of the European periphery is not unlike the case of Argentina under the 'currency board' in the 1990's. Argentina's currency board arrangement promised to keep every peso in issue backed by one US dollar held by the board. Foreign investors, encouraged by this removal of exchange rate risk, poured funds into Argentina's government bonds to profit from their spread over treasuries. Argentina's government was happy to oblige and fed the demand by increasing the supply of such bonds and engaged in a relentless spending orgy. Interest rates declined sharply.
However, what was seemingly overlooked by everyone was that Argentina's domestic banking system remained a fractionally reserved system and consequently began to expand the money supply at an astonishing pace, creating fiduciary media in great abundance as it pyramided credit atop the large increase in bank reserves provided by the influx of dollars. From 1991 to 1994, the money supply grew at 60% per year. It then slowed down to less than 5% in 1995, only to accelerate again to 15% in 1996 and over 20% in 1997. Then the influx of dollars ceased, as the inflation of Argentina's money supply of course had the effect of raising domestic prices, attesting to the fact that the peso was vastly overvalued. Foreign creditors began to become nervous, suddenly doubting that the currency peg could be maintained. The money supply expansion came to a screeching halt and soon turned into outright deflation. Not surprisingly, the government decided to shaft depositors in order to save the banks, abrogating their property rights by cutting off their access to both dollar and peso deposits. The 'backing' of the peso by the currency board turned out to have been a sham.
The advent of the euro had a very similar effect on the euro area's periphery – there is very little difference from a practical standpoint between the currency board of Argentina tying the peso to the US dollar and peripheral countries in the EU adopting the same currency as Germany. Certainly the economic effects were exactly similar: a large influx of foreign investment, sharp declines in interest rates, and a massive domestic credit boom, often paired with large increases in government spending. The major difference to Argentina's case has been revealed only now as the bust has arrived: via the TARGET-2 payments system and various bank funding schemes provided by the euro-system (from LTRO's to 'ELA'), the flight of both foreign investors and domestic depositors from the peripheral banking systems can be camouflaged (one of the reasons why the ECB is so adamant that the euro is 'irreversible' is that this camouflage cannot be maintained otherwise and the losses would then crystallize).
Naturally, no new credit boom is likely to emerge in the periphery in the near future. However, the shoe is now on the other foot: the ECB's ultra-easy monetary policy may well lead to a credit boom in the 'core' that has sat out the peripheral boom. Moreover, not one of the measures taken by the EU thus far actually addresses the root of the problem – should the present crisis come under control, all the basic requirements for a repetition of the boom-bust sequence will still be in place – and a banking union will make this even more rather than less likely.
Thank you for your support!
In case you prefer to donate bitcoins, the address is: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
Follow us on Facebook!