Banking Union: the Way Towards a New European Political Settlement

Speech delivered to the Conference on

„Monetary and Financial Stability in Europe“

organized by

International Institute of Social and Economic Sciences, Washington

Faculty of Economics, University of Economics, Prague

September 2nd, 2013, Prague

 

Ladies and gentlemen, distinguished guests,

 

first of all let me thank you for the invitation to your conference. I appreciate it. You have chosen for your annual conference challenging topics that focus on monetary and financial stability in Europe. 

 

You hit a nail on its head, I would say. Apparently, this is the most important and paramount economic issue, which is overarching on going processes in one part of the European continent called the European union.

 

Allow me, as a member of the European Parliament for the Czech Republic where I work in the Committee on economic and monetary affairs, to contribute with a few “insider’s” remarks or ideas that will reflect the current development as well as may draw perspectives of a possible future political movement.

 

Naturally, apart from the pure description of the current situation I am going to comment processes in the European Union from my perspective and I would like to sum up my today’s contribution with my personal points based on my almost ten-year-long experience with European Institutions.

 

Fundamental starting points

 

European institutions, in cooperation with majority of member states, have given rise the way towards creation of the centralised fiscal policies and towards finalising a centralised supervision of banks and financial institutions as well as the creation of a mutual guarantees mechanism.

 

They stubbornly insist on the idea that such a mechanism (which is called the banking union) can both commonly and practically heal causes of the financial and economic crises and, on top of that, will vitally eliminate the eruption of such crises forever in times ahead.

 

Such an approach arises an essential question whether the project of the banking union is a proper and relevant reaction based on serious and responsible analyses of genuine roots of the financial and economic crises.

 

There are a few rudimentary questions, which should be answered beforehand and which we are obliged to ask for:

 

  1. What are real causes of the European financial and economic crises?
  2. Is the proposal of a so-called banking union a healing answer to those causes?
  3. Does the proposal respond to the current political and economic settlement in Europe?
  4. What must or should be met in attempts to finalise the fully-fledged banking union?
  5. What are possible losses and benefits of the process?
  6. Is not the idea to make up the banking union, as the political answer to prevent our civilisation against further crises, a text-book evidence of abusing power by bureaucrats and their state?
  7. Is it a project that has been brought forward in line with a due and appropriate democratic mandate or is it a project that has been  facilitated in a customary “European” way where citizens do not neither know nor approve such steps and are, by and large, forced to accept them?
  8. Are not we witnessing a process that is to deliberately change a European political map for decades ahead?
  9. Is it a series of actions and steps that we wish and take as a process which will stimulate economic growth and prosperity as well as foster future social and political stability on the important part of the European continent?

 

Those are, ladies and gentlemen, in my opinion urgent and pressing questions that I would like partially to answer today.

 

And, let me at the very beginning say that we are discussing nothing less than a birth of a new revolutionary European political settlement looming in front of us.

 

Is the proposal of a banking union a correct answer to current European economic and social problems?

 

All accessible economic statistical data show that we must look for vital causes of the startling economic situation of European countries and the level of their immediate economic troubles in policies supporting so-called a European welfare state.

 

The “eurosclerosis” which I understand as a combination of a long-term economic stagnation or even recession, high unemployment rates resulting in growing social tension, huge and unprecedented debts of public finances, ageing societies without relevant political answer to this reality and a logical and subsequent loss of a global competitiveness - all are deeply rooted in the European welfare state.

 

We may blame managers of financial institutions for their disputable and in many cases irresponsible behaviour but the massive expansion of the welfare state that has taken years following the World War II is the genuine and vital reason for dire fiscal situation of the overwhelming majority of European countries. Governments have been taking more and more responsibilities for more and more areas of their citizens’ lives. The retirement and health care to protect us against unemployment and guaranteeing a minimum level of income have evolved into bigger and costly and ever more intrusive social state taking care of us from a cradle to our grave. That process - emulated and supported by politicians to be “ever elected” - inevitably resulted into the level, which has become unaffordable.

 

Politicians driven by the vision to be “ever-elected” therefore have had considerable influence on the growing size of debts of public finance. Their attempts to accuse banks and financial institutions for triggering economic troubles are, in my opinion, unfair.


 

We must bear in mind that banks and financial institutions have acted in regulatory environment set by politicians and bureaucrats in governments and government agencies (prone to corruption, as Ludwig von Mises rightly said). Supervision of financial sector has been lax and governments driven by self-interest in many cases even pushed financial institutions into obscure deals. We cannot mix causes and consequences.

 

Well, but not only the European welfare state is the reason of current economic problems. We should not forget the existence of the European common currency as a political project forging the process of the European unification.

 

The system of fixed exchange rates in the society of different national economic efficiencies, in the space with low movement of labourrigid labour market and zero or low mobility of employment and in the frame that does not fulfil criteria of the optimum currency area must have evolved into the area with a none, stagnant or shallow economic growth.

 

The longing for “entitlements forever”, fears of politicians not to be elected, ideological emptiness of politics, the creation of the common European currency without meeting basic economic criteria; overregulated, ever more harmonised and overredistributive European legislation - those are genuine reasons of the alarming European economic and social situation.

 

Banking union as a Summon of the Long-lasting Process

 

Despite of the fact that there is a banking union in the title of my today’s speech and one may expect me to speak on this subject in details and much more specifically, I do not. The reason is simple.

 

 I do not understand the proposal of the banking union as an isolated project but just one part of a stream stemming from European bureaucratic elites to get influential powers over member states fiscal policies.

 

The banking union, no matter what we can perceive under the phenomenon in this moment, is a part of the chain of different political measures that are advocated as a toolkit to increase fiscal disciplines of EU member states, above all those which are members of the European monetary union.

 

 

Allow me to mention at least a few of such measures that are overarching the process towards the banking union

 

The chain of measures consists of

  • programme reinforcing the Growth and Stability Pact including surveillance on fiscal policies of all EU member states,
  • creation of the system of common budgetary rules mandatory for each EU member state and triggering rules guarding that each state follow those rules, something that is called a European Semester,
  • pact Euro Plus,
  • Capital requirements Directive
  • Tax harmonisation process called common consolidated corporate tax base
  • immense pressure on the introduction of more than disputable and likely counterproductive financial transaction tax.

 

These are several important examples of legislation that have been adopted at least since 2007. This process described above - that I have been witnessing in the European Parliament for years - gives me a chance again to oppose media and politicians beloved singsong chanting that the real cause of the financial crises is an irresponsible behaviour of financial managers which should be healed by better and more sophisticated regulations. Such regulations subsequently exclude similar crises forever in the future – they say.

 

I claim that the proposal of the banking union is another European project to create the fiscal union with institutions and rules necessary for a proper, or at least better, function of the monetary union. The banking union is not an aim just for its sake - neither in short nor a middle perspective.

 

It is the project, again unfortunately political like the common European currency, to find technical solutions how to reinforce or improve those elements that may change member states of the EMU in a better optimum currency area. It is a political attempt to draw a new future European settlement with federal or even centralised parameters.

 

Such a process, finally, must change European political settlement because a common monetary union is inseparable from a common fiscal union. But a common fiscal union can hardly survive without a political union.

 

The banking union proposal consists of a few pillars, two of them are worth being mentioned here today: the Single Supervisory Mechanism and the Single Resolution Mechanism.

 

The former one, SSM, has been approved for banks to be led by the ECB in order to strengthen the EMU. The SSM is the set of proposals as a first step towards an “integrated banking union” which includes further components such as a single rulebook, common deposit protection and a single bank resolution mechanism.

 

The latter one, Single Resolution Mechanism, is thought to be a complement to the SSM and would ensure – with stronger supervision – each bank facing difficulties with financial resolution that could be managed efficiently.

 

It sounds innocent and may not respond to my worries. But, the president of the European Commission accompanied the basic layout of the banking union with his words: “This is the point of today’s proposal for a Single Resolution Mechanism: by ensuring that supervision and resolution are aligned at a central level…. And backed by an appropriate resolution funding arrangements, it will allow bank crises to be managed more effectively from one centre.”[1]

 

Conclusions:

 

  • Current European economic and social difficulties and problems are deeply rooted into so-called European welfare state.
  • The welfare state triggered endless stream of entitlements and demands for social protection in combination with ageing European populations could have been met by huge debts of public finance
  • The common European currency was a political project without handbrakes ensuring responsible behaviour of its members and short of safeguards eliminating “free-riders” that have not kept common rules and discipline
  • The European welfare state, irresponsible political decision-making process as well as the existence of the common currency without proper parameters fulfilling criteria of the optimum monetary area in fact opened a “window of opportunity” for current deep economic and social European problems
  • A proposal of the banking union is not an isolated project. It is a vital part of measures drawn by the European bureaucrats to get as much power as possible over national policies. It is the evidence that states and its bureaucrats abuse crises to steal power for themselves
  • In his Annual Address on the State of the Union president of the European Commission José Manuel Barroso said: “… let’s not be afraid of the words: we will need to move towards of federation of nation states. This is what we need: This is our political horizon. Democratic federation of nation states can only tackle our common problems… we cannot continue trying to solve European problems with national solutions.”[2]
  • The so-called banking union is a part of the chain that will evolve into the finalising of the fiscal union. I would dare say this process is being accompanied with a certain voluntary support of national politicians that are not able to find ambitious resolution of ongoing problems on the national levels.
  • An existence of the fiscal union will unconditionally evolve into a form of a political union. Without democratic mandate given by citizens of member states.
  • Attempts to finalise fiscal union will result into a new European political settlement whose shapes we may estimate or even foresee

 

Ladies and gentlemen,

 

My theses for today’s speech are dominantly based on my experience form the European Parliament. It was a political speech far from being an academic one. I am aware of it.


 

But honestly said, current European problems have been caused by mistaken political decisions. I am absolutely sure that politicians must be those who will be brave enough to address vital roots of the problems and politicians must be those who will draw a way out.

 

Thank you for your invitation and for you kind patience.

 

 

Ivo Strejcek

Member of the European Parliament for the Czech Republic

Civil Democratic Party

www.istrejcek.cz

September 2nd, 2013 

 

 

Videokanál YouTube

Můj videokanál na YouTube.

 

Blog iDnes.cz

Blog na Facebook

Můj blog na serveru facebook.com

Důležité odkazy

CATO INSTITUTE
INSTITUT VÁCLAVA KLAUSE
Václav Klaus