Opinion

Scholz’s improved plan to complete the banking union

The head of German Finance has written in the Financial Times defending the need to deepen the banking union, now London is about to leave

By: and Date: November 8, 2019 Topic: European Macroeconomics & Governance

Germany’s finance minister wrote an op-ed to praise the idea of pan-European deposit insurance, but if this is progress, it’s only the start of the debate.

Olaf Scholz wrote in the Financial Times of an “undeniable” need to deepen the euro area banking union. With London on the verge of departure, the European Union will lose its biggest financial hub and come face to face with the shortcomings of its homegrown financial architecture.

And Scholz is right that the euro needs true deposit insurance, where a common framework would ensure that up to €100,000 in any bank is as protected as any other in the monetary union. Right now, the backstop threshold is EU-wide, but actual protection is left to individual countries. With the divisions of the crisis fresh at hand, investors and citizens are right to distrust this promise.

To optimists, any sign of German loosening is forward motion. These observers rejoiced when the euro area agreed on a timeline for preparing a roadmap – just to start political talks. They can take heart now that Scholz is not demanding changes to the EU Treaty, as had his predecessor Wolfgang Schäuble.

But Scholz’s long list of caveats suggests that Germany isn’t quite ready to roll up its sleeves and get to work. He could have joined the European Central Bank’s Christine Lagarde and the European Stability Mechanism’s Klaus Regling in calling for a focused push to reduce legacy risks and develop a common system. Instead, he’s listed deposit insurance as one brick in a very big wall.

Risk reduction ­– particularly of bank holdings in sovereign debt ­– is the most relevant precondition, shared by other countries wary of any mutual risk sharing. The euro area would depart from international standards by penalising banks who hold lots of government bonds, but proposals exist to do this in ways that might work.

Scholz further calls for EU-wide insolvency procedures, particularly as applied to smaller banks not covered by the euro area’s new resolution framework. This is a good idea, and it is beginning to gain traction but will be hard to implement. Likewise, Scholz’s endorsement of deposit insurance calls for a reinsurance of national systems, which sceptics would say falls short of a true European scheme.

Germany and France have worked together to jumpstart “capital markets union”, an unwieldy project that aims to integrate financial architecture across the EU. Insolvency improvements are part of this framework, as are a wide range of other proposals.

It’s impractical, however, to suggest that deposit insurance should wait on this laundry list. Scholz singled out corporate taxation as one element that needs addressing, calling for “uniform taxation of EU banks” and linking it to a long-debated proposal to harmonise the corporate tax base.

It’s hard to see how better banking union would have any effect on what taxes banks pay, let alone create “competition-distorting tax arrangements.” Second, EU tax policy is decided unanimously, and corporate tax proposals are notoriously fractious. Scholz notably calls for a “common corporate tax base” without mentioning “consolidation”, the plan’s second stage that would not only set common standards but make sure revenues are distributed fairly.

Euro area banking union has made huge strides since its June 2012 birth. Common banking supervision at the ECB has been a general success, five years since its November 2014 start date. Likewise, the region has put in a strong framework for handling failing banks, even if some refinement is needed. Deposit insurance is the big missing link.

There are proposals now that could satisfy the demands for “risk reduction” while allowing a common deposit insurance program to move forward. Scholz’s current platform hasn’t yet joined them.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read about event
 

Upcoming Event

Sep
2
13:00

European banks: under global competitive pressure?

Bruegel Annual Meetings, Day 2 - European banks have lost stature and remain generally low-profitability, low-valuation in comparison to their global peers. Is that a problem? If so, what can EU policymakers do to address it?

Speakers: José Antonio Álvarez Álvarez, Mairead McGuinness and Nicolas Véron Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Palais des Academies, Rue Ducale 1
Read article Download PDF More by this author
 

External Publication

European Parliament

UK banks in international markets

Implications of UK-euro area divergence in regulation and supervisory practice

By: Alexander Lehmann Topic: European Parliament, Finance & Financial Regulation, Testimonies Date: June 25, 2021
Read article Download PDF More on this topic More by this author
 

External Publication

The Value of Money, Controversial Economic Cultures in Europe: Italy and Germany

A discussion of Italian and German macro-economic cultures and performances.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: June 10, 2021
Read article More on this topic More by this author
 

Blog Post

Inflation!? Germany, the euro area and the European Central Bank

There is concern in Germany about rising prices, but expectations and wage data show no sign of excess pressures; German inflation should exceed 2% to support euro-area rebalancing but is unlikely to do so on sustained basis.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: June 9, 2021
Read article Download PDF More by this author
 

External Publication

European Parliament

What Are the Effects of the ECB’s Negative Interest Rate Policy?

This paper explores the potential effects (and side effects) of negative rates in theory and examines the evidence to determine what these effects have been in practice in the euro area.

By: Grégory Claeys Topic: European Parliament, Finance & Financial Regulation, Testimonies Date: June 9, 2021
Read article Download PDF
 

Policy Contribution

Accounting for climate policies in Europe’s sovereign debt market

Sovereign debt will be vital in stimulating sustainable investment, but information is lacking on how green public spending actually is.

By: Marta Domínguez-Jiménez and Alexander Lehmann Topic: Energy & Climate, Finance & Financial Regulation Date: May 3, 2021
Read about event More on this topic
 

Past Event

Past Event

Taking stock of global sustainability reporting

This closed-door event will discuss standards for the measurement and disclosure of climate-related exposures.

Speakers: Carole Crozat, Sonja Gibbs, Piers Haben, Lucile de la Jonquière, Alexander Lehmann, Sara Lovisolo, Fayyaz Muneer and Lee White Topic: Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: April 20, 2021
Read article
 

Blog Post

Urgent reform of the EU resolution framework is needed

In this blog, the authors argue that two aspects of the European resolution framework are particularly in need of reform – the bail-in regime and the resolution mechanism for cross-border banks – and propose a reform of both.

By: Mathias Dewatripont, Lucrezia Reichlin and André Sapir Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: April 16, 2021
Read about event More on this topic
 

Past Event

Past Event

An alpine divide? Comparing economic cultures in Germany and Italy

A discussion of Italian and German macro-economic cultures and performances.

Speakers: Thomas Mayer, Patricia Mosser, Marianne Nessén, Hiroshi Nakaso, Francesco Papadia, André Sapir and Jean-Claude Trichet Topic: European Macroeconomics & Governance Date: April 13, 2021
Read about event More on this topic
 

Past Event

Past Event

Presentation of the Euro Yearbook 2021

Join us for the launch of the eighth edition of the 'Euro Yearbook'

Speakers: Maria Demertzis, Fernando Fernández, Fiona Maharg-Bravo, Antonio Roldán and Jorge Yzaguirre Topic: European Macroeconomics & Governance Date: March 12, 2021
Read article Download PDF More on this topic
 

Working Paper

COVID-19 credit-support programmes in Europe’s five largest economies

This paper assesses COVID-19 credit-support programmes in five of the largest European economies, and examines how countries have dealt with trade-offs raised by the programmes.

By: Julia Anderson, Francesco Papadia and Nicolas Véron Topic: European Macroeconomics & Governance Date: February 24, 2021
Read article More on this topic More by this author
 

Blog Post

Has the European Union squandered its coronavirus vaccination opportunity?

The European Union’s purchases of frontrunner coronavirus vaccines are insufficient for the population’s near-term needs. The shortfall could have healthcare consequences and might delay economic reopening. Lessons should be learned for future pandemics.

By: J. Scott Marcus Topic: Innovation & Competition Policy Date: January 6, 2021
Load more posts