Why the ESM direct bank recap deal is not done yet

The Eurogroup has just come to an important conclusion as regards the ESM direct bank recap instrument. The importance of this decision is very significant and shows discernible progress on the way to a complete banking union. Yet, at the same time, important problems can still arise. Peter Spiegel has a good summary of yesterday’s deal and Gabriele Steinhauser tweeted the full text of the conclusion.

Is the deal really closed? The answer is no. The ESM currently does not have the instruments to do direct bank recap. For this, a decision based on Article 19 of the ESM Treaty will be required and the Eurogroup statement does say that national procedures need to be finalized before the ESM Board can take such a decision. The most significant obstacle in this respect will be the German Bundestag. In fact, the ESM Finanzierungsgesetz. Article 2 of the German implementation law of the ESM treaty explicitly excludes direct bank recap. For yesterday’s decision to become effective, the German Bundestag will therefore have to change the German law. In the absence of that vote, the German ESM member Wolfgang Schäuble will not be able to decide on the bank recapitalization instrument.

The big question is whether the current government in Germany will be able to still pass the legislative changes or whether this will fall in the next legislative period. I suspect that this is quite unlikely. It will be difficult for the German parliamentarians to agree to a bailout of banks in other countries right in an electoral campaign. Also, the necessary time lags to pass a new legislation may be difficult to meet. So overall, this is an important step forward but it not a done deal yet.