Shahin Vallée: We are just a few days ahead of an important European Council meeting. There have been a number of discussions around this meeting. Banking union on one side, discussion about budgetary integration, political union and of course, the discussion about the growth agenda. What do you think are the important topics and what do you think are the likely outcomes of this summit?
Guntram Wolff: I would say all the topics are important, because we live in extraordinary times. The situation is extremely tense, market uncertainty is very high and people fear the collapse of the euro. There will have to be very difficult discussions and very clear decisions to be taken. We have to have more discussions about what a banking union is and how it is put in place. But I also think the issue of economic growth is crucial. I would argue that they both relate. One of the main reasons for low investment and low confidence in economic activity and consumption is the high uncertainty that the crisis generates. We see even in a country with very good fundamentals such as Germany, we see investment to be extremely weak. In other words, a good solution to the Eurozone crisis which probably involves a banking union and some sort of political union will also be instrumental for growth. So I think they need to be treated together.
SV: More specifically on the banking union. You are releasing a paper on this topic which has been heavily discussed but where there is very limited clarity. Can you explain concretely what a banking union is and why it is so necessary now?
GW: A real banking union would involve an element of supervision where you supervise banks centrally throughout the Eurozone or the EU as a whole. You would need to have an element of common deposit insurance to prevent deposit flights, you obviously have common regulatory elements, and finally and most importantly you need common resolutional authority. In other words, we have banks in some countries that are at the limit of being viable, or are not really viable at the moment, and we fail to solve their problems at the moment. This needs to be done in order to regain stability in the system.
SV: Why is this something that is so urgent now? And do you think this can be delivered within a reasonable amount of time? Aren’t we, with this banking union discussion, preparing for the next crisis as opposed to solving the current one?
GW: We certainly need urgent action in a number of points including the deposit stabilizing or reversing the deposit outflows from a number of banks, especially in the South of Europe, but we also need a credible roadmap of where we need to go. The key will be how to combine the short term with the long term, and that is the real challenge, because obviously the longer banking union cannot be a mean of addressing debt overhand that we have in a number of banks in some countries in the Eurozone. We need to find a solution to the short term debt overhand, which is very significant in some cases where it may amount to 10 or 20% of GDP. This needs to be resolved and at the same time we need to see how we come from the current situation to a more stable financial banking system in the future. This transition is very difficult to manage and it is easier to conceive a long term vision than to solve the current problems; that is the real problem of this summit. My advice is to have a very concrete roadmap on how to go from today to tomorrow and state all the steps that need to be taken.
SV: One question that revolves around banking union is also whether this is a construct for the monetary union to stabilize the imperfection in the initial design of the monetary union, or whether if this is a construct for the EU as a whole, which would involve the UK. How do you see this divide between a banking union for the monetary union and a banking union for the EU as a whole.
GW: Well I would say the banking union is of vital importance for the euro area, but it is certainly desirable to be happening at a larger level. Certainly countries that want to join the euro very soon should have transitional arrangements to know how to enter and how to access the monetary and banking union. If countries clearly decide to stay out of the monetary union, there is much less need for them to join, but still you want to preserve the most important parts of the financial market, the integrity of the single market.
SV: Isn’t in fact the discussion about the banking union also bringing a discussion about special interests and capture by the financial system of the regulatory function?
GW: The experience of the last two years shows that national supervisors have a tendency to delay the resolution of problems and later on the problem becomes much more costly. We do want to shift supervisory and resolution authority to a supranational level as much as possible.