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EP is wrong blocking SRM/ SRF`s inter-governmental part

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Our readers will find several earlier postings on this website explaining that Berlin was dead set against using Art 114 TFEU as legal basis for a Single Resolution Mechanism (SRM) connected to the needed backstop of a Single Resolution Fund (SRF) .

Therefore, German finance minister Wolfgang Schaeuble and German chancellor, Angela Merkel, only accepted a compromise on the single resolution mechanism combining elements of Community and Union method, in effect, insisting on an inter-governmental agreement on the functioning of the Single Resolution Fund ( FRS).

This way Lithuania was able to conclude its Presidency of the ECOFIN Council on December 18, 2013, in Brussels with a compromise deal on the Single Resolution Mechanism for dealing with failing banks as the second pillar of Banking Union.

As was to be expected the negotiations  with the European Parliament in view of  adopting the regulation before the end of the current parliamentary term, so that the Single Resolution Mechanism could enter into force on January 1, 2015, are turning out as a very tough ride.

EP leaders like Martin Schulz and Sharon Bowles are warning the Greek EU presidency – with the Green MEP Sven Giegold supplying a set of questionable legal arguments  – that the EP will not support the agreement on bank resolution. They specifically object to the inter-governmental side-agreement setting out the important operational side of the new system, namely the schedule of mutualisation.

They argue in the EP letter to the Greek presidency that the agreement “constituted a breach of EU law” – A few days later the Green-party EMP Giegold posted a legal document, which argues why the inter-governmental agreement (IGA) on the SRM violates European law. “Legal scholars as well as the legal services of the European Commission and the Council”, the document concludes, “ consider that the legal base of Art 114 TFEU covers all subject matters of the proposal of the SRM. The decision to outsource parts of the rules on the SRF from the SRM regulation into an IGA leads to a conflict between Community method and Union method”.

Achim Duebel of the financial market research firm Finpolconsult (www.finpolconsult.de) puts big question marks behind the European Parliaments opposition against the Council ´s compromise agreement writing: “I have a hard time to understand the logic of the EPs argumentation. On the technical level, there is no ‘federal’ budget in Europe to provide for the fiscal backstop required for the bank-sponsored fund to be created under the SRM, the SRF. With national parliaments and governments being asked to sponsor possible backstops (plus other possible costs) of bank resolution, having the direct decision-making line from the national level to the SRM is a sine-qua-non.”

And Duebel continues: “So how would the obviously far more material EP involvement that is asked for here, without providing much detail, then address the EPs concern about the already complex decision-making processes? It would be just another complicating add-on. The EP would be consistent if it asked for a transfer the fiscal backstop capacity, including then the ability to authorize debt issuance should predetermined amount be insufficient, to the European level. This would then be a quite decisive step towards fiscal union. This is something worth discussing, going forward.”

And looking at the policy level Duebel argues: “Please note that the entire idea of the SRM is to empower the fiscal side vs. the monetary policy side that so far has dominated the European banking crisis, with disastrous results for bank creditors and national fiscal policy. Those interested should check among the many the case of Laiki in Cyprus, where the ECB provided almost EUR 10 billion in ELA and the fiscal side became only involved at the last minute, facing dire alternatives that led to a catastrophic event for the European bank investor market. If people do not understand the case for early and decisive action from the empirics of this case, they do not understand finance.”

So Duebel concludes: “ So the EPs threat to block the intergovernmental agreement enabling the fiscal side to move faster seems to go hand in glove with the efforts of some in the banking sector and investor community to hand over crisis management if possible entirely to the ECB, the sugar daddy of the banks. Is that the EPs intention? Or is the posturing that we see part of the self-delusion that apparently some in the EP harbor, namely that they could somehow ride the tiger ECB during a banking crisis and intervene into misguided lending programs to insolvent banks? All facts on hand show that the EP is unable do this job. “

His bottom line: “The banking union project requires an architecture of checks and balances. The creation of the SRM – a precursor in my view to a European FDIC – is important to contain the bank-central bank cartel that has maximized Europe’s banking crisis costs.”

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