For some time, the European Commission has believed that, for the European banking system to be truly resilient and equal across the continent, it needs a common supervisor, a common deposit insurance scheme and a common resolution system. A common supervisor means that banks are treated equally in health, a common deposit insurance scheme that they will be treated equally in sickness, and a common resolution scheme that they can be treated equally in death. Only in this way can banks compete on equal terms across the euro area, free of the link with their national governments.
The first and last of these are now largely in place. But a common deposit insurance scheme has proved more contentious, with Germany foremost among those opposed.
Last November, the European Commission published a proposal for a European deposit insurance scheme (EDIS). This month Ludger Schuknecht, the German federal finance ministry’s chief economist, published a critique of the proposal, unusually in English. We can perhaps take it that this is Germany’s official and considered response to the Commission’s carefully argued proposal.
And very revealing it is. It is not even clear whether Schuknecht considers deposit insurance a good idea at all. At times, he appears to argue that all insurance invites moral hazard (because someone else will pay for your errors), so one should not build better insurance in the first place. This is even though Germany has a very extensive national system of deposit insurance and mutual support for its banking system.
On the other hand, he claims that the euro area’s insurance framework is already excellent. For example, he states that, ‘In recent years, an impressive framework of solidarity systems and safety nets [has] been created for the benefit of euro area’s members.’ It is hard to agree with this. For many, it is the weakness of the insurance framework that is more evident. It signally fails to break the sovereign debt-weak banks ‘death loop’. And it is precisely because of this that there is pressure for a genuine non-state-based EDIS.
Schuknecht claims that EDIS would lead national governments to abandon their current insolvency regimes. This is an odd argument. There is little evidence that even far-reaching deposit insurance schemes cause banks to be more reckless in their lending activities, or national supervisors to be more lax in their supervision.
He then tries to show that the funded nature of the EDIS will be ineffective because, ‘What happens when the common fund is empty? A discussion about a common public backstop – in other words, collective liability among countries – is inevitable.’ Here, we are getting to the heart of the matter: German policy-makers fear that German taxpayers might have to pay for the failure of other countries’ banks.
It is hard to avoid the conclusion that, ultimately, this is what Germany finds unpalatable about the EDIS proposal.
Nor is this assessment dispelled by Schuknecht’s next observation, where he suggests a serious flaw in the system is that, ‘This is not primarily a question of Germany’s interests. Rather, it’s about having proper rules from the European perspective. If one considers that as a result of EDIS, Portuguese or Slovak contributions would have to be used in the event of losses in Germany, the political risks arising from the mutualisation of liability also become clear.’
Are we to believe that Germany objects to this scheme because it might put an onus on poor little Slovakia to help rescue German banks? Is it the German government’s sole concern and objective to lift this threat from Slovakia’s shoulders? How transparently disingenuous.
Schuknecht’s article is an elaborate charade that can be summed up in one sentence: ‘This is a terrible idea because it risks German taxpayers being forced to pay for other countries’ failures.’
It is hard to avoid the conclusion that this is a fair reflection of the German government’s entire opposition to EDIS. In this sense, Schuknecht’s critique has provided a valuable service. The finance ministry’s chief economist has shown us that, in defining the needs of the euro area and the single currency, national self-interest is the dominating influence. If this is true for the euro area’s largest economy and biggest creditor, then it is likely to be true of other member states. Over the migration issue, Germany has been calling for more European solidarity. In money and finance, this characteristic is conspicuously absent.
John Nugée is a Director of OMFIF and a former chief manager of reserves at the Bank of England.