EBRD urges EU to seal banking union deal

European Union policymakers must finalize plans for a comprehensive banking union to prevent a repeat of the financial crisis that swept through Eastern Europe two years ago, according to the EBRD’s chief economist.

Erik Berglof told Emerging Markets before the EBRD annual meeting in Istanbul there had been a noticeable decline in deleveraging by western banks in Central, Eastern and South-Eastern Europe.

Describing this as a “bright spot” in the region’s economic outlook, he said that the issue had not completely dropped off the agenda but stressed that “the urgency that we saw in the second half of 2011 has gone”. Berglof warned that the current inflows of capital into the region could reverse if the European Union stalled on its plans to tighten bank regulation.

He said the immediate cause of the slowdown in deleveraging had been the ECB’s outright monetary transactions (OMT) programme that effectively pledged to underwrite any failing state and “signals of reform of the supervisory and regulatory structure and on banking union”.

“But of course the recent signs are not as positive on that front,” he told Emerging Markets. “We are proceeding with the single supervisory mechanism, but the progress on the resolution side and the deposit insurance side in particular is not very encouraging.

“That is extremely important for our region. We very much need this structure to sustain the cross-border banking flows that are so essential to the short and long term growth prospects of the region.”

Hopes of an agreement rose this week after German finance minister Wolfgang Schaeuble, who last month said the EU needed to consider treaty changes due to the “doubtful legal basis” on which banking union was based, appeared to soften his stance.

On Tuesday he said banking union was a “priority project” and promised to press ahead with it “quickly”, adding that banking union could move ahead in the meantime by harmonizing national resolution schemes.

Berglof said all countries in the EBRD region shared an interest in the completion of the banking union and “getting all the components in place. That is what is worrying. It is very good to have coordinated supervision but we need the rest.”

Berglof will later today publish his latest economic forecast for the region. He told Emerging Markets that there had been a noticeable slowdown in both the eurozone and in Russia, the EBRD region’s largest economy.

“Compared with our last assessment in January, Russia has slowed down more than we had expected and that of course has impacted on a number of countries that depend very much on Russia. This is clearly having an effect on the region.”

But export growth was up in central Europe and south-eastern Europe. “So that is a sign that the immediate impact of the eurozone crisis seems to have abated,” Berglof said.

He warned, however, that transition countries in the region needed to continue with structural reforms to close a competitiveness gap.

“The long-term competitiveness issues in the region are still there. Investment has come down and you do not see productivity improvements,” he said.

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