Eurogroup dines in hopes of banking union breakthrough – POLITICO


The way to the hearts of finance ministers is through their stomachs. Or at least, that’s what Eurogroup President Paschal Donohoe hopes.

The EU’s attempt to introduce a shared deposit insurance scheme may be charred, but that hasn’t ruined the president’s appetite to discuss it over dinner.

The Irishman revealed he invited the bloc’s finance ministers to dinner in the Council after the Eurogroup meeting next Monday. Donohoe is determined to use the Gourmet Meal to help renew the urgency among CFOs to complete a project born out of the Eurozone financial and debt crisis of the past decade.

“I will organize a dinner in Brussels next Monday evening with all the ministers involved in the banking union project to re-engage on how we can move forward,” Donohoe said at a press conference Monday. press conference after meeting the French Minister of Finance Bruno Le Maire in Paris.

The project, known as the Banking Union, is designed to create a single rulebook for lenders and protect savers and taxpayers from another government bailout of banks.

Donohoe hopes that the Council’s cookbook can be as effective as the Brussels playbook. But if all of Monday’s dinner doesn’t go well, Donohoe will put his priorities elsewhere, said three officials briefed on the plans for the dinner.

All for one, one for all?

Of course, progress has already been made.

Two of the three pillars of the banking union are in place: Banks are now subject to strict rules that define the extent of their capital buffers and ensure that they put money into a crisis fund to do so. faced with the cost of liquidating the operations of an establishment in serious financial problems.

What is missing is a European Deposit Guarantee Scheme (EDIS) which can strengthen and possibly merge national guarantees of up to € 100,000 of people’s bank deposits into a single fund.

The fear is that these national guarantees will run out in a widespread banking crisis, like the 2008 financial crisis, which forced governments across the bloc to help rescue lenders on the brink of collapse with public money. . If another banking crisis erupts, people’s savings could be at stake without EDIS in place.

And yet, despite concerns about the pandemic’s impact on financial markets, no deal is in sight.

The political stalemate over EDIS, first proposed in 2015, stems from mistrust between North and South. Northern capitals fear that a shared deposit insurance system could put their banks at risk for southern savers, and they demand that financial risks within the industry be defused before the introduction of EDIS .

The EU had succeeded in mitigating many of these risks by reducing the amount of bad loans banks held in the aftermath of previous financial crises. Then the pandemic struck, forcing governments and businesses to borrow billions to avoid mass unemployment and bankruptcy. This massive support helped the EU economy to rebound quickly after the worst recession since World War II.

However, high corporate debt could soon become an issue once the large budget support for the pandemic is withdrawn, the Commission recently warned. This would leave businesses on their own to pay off their bills and bank loans.

Bank balance sheets could quickly deteriorate if companies cannot repay their loans, making it much more difficult to lend more money – a death knell for a recovering economy.

Some in Brussels had hoped that Germany’s new coalition government – a center-left group of Social Democrats, Greens and Liberals – could breathe life into the EDIS debate. The coalition manifesto, however, made it clear that the new government did not intend to pursue EDIS as proposed.

“Full pooling of deposit guarantee systems in Europe is not the goal,” the manifesto said. Instead, Germany is “ready to create European reinsurance for national deposit guarantee schemes” – but only after the bloc has further reduced risks in the financial sector.

While details are pending, those close to the negotiations suspect the deal could result in a reinsurance scheme in which countries’ deposit guarantee funds lend each other money in times of urgent need – commonly called hybrid EDIS.

On the menu

Ministers will be curious to hear the Berlin speech – and the conditions attached to it – over dinner. But Donohoe has no plans to make a deal through dessert.

He and his team in Dublin and Brussels are working on a simple work plan in the coming months that sets out the steps to create something close to EDIS. It’s a delicate balance. This roadmap must keep the North on board by defining a range of risks to be addressed, while ensuring that the EDIS alternative is sufficiently attractive to the South.

All eyes will be on Italy, in particular. In July, Rome rejected Germany’s demands to reduce the amount of its national government’s sovereign debt that banks can hold. This would reduce the dependence between the state and the lender, known as the fatal loop, as the relationship can quickly deteriorate if either experiences financial difficulties.

Their disagreement caused efforts to reach an agreement this summer to fail. But Donohoe pledged to “return to work later in the year to come to an agreement on a work program at this point.” This proved impossible after the German coalition talks continued after the September elections.

Three months later, Berlin has a new government, but its negotiating position seems unchanged. Donohoe hopes his diplomatic dinner doesn’t turn into a food battle.

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