Hopes that European leaders would use the IMF annual meetings to push forward plans for a banking union were fading on Thursday after the Swedish finance minister raised doubts over the plan while leading economists warned of a split within the EU.
Swedish Finance Minister Anders Borg called for compromise between EU countries that favoured rapid moves towards banking union, and Germany and core eurozone members that preferred a more cautious pace.
Borg told Emerging Markets that there must be “balance concerning financial institutions inside the eurozone and those EU states like Sweden and Britain on the outside”.
He said the new regulatory regime must be inclusive and not penalize countries like Sweden, which have higher bank requirements than elsewhere in Europe.
Borg opposes the European Central Bank being the sole regulator of EU banks, saying it would undermine Sweden’s freedom to have more stringent bank capital requirements.
Phillip Suttle, chief economist at the Institute of International Finance, said disagreements over banking union “could split the European Union.”
EU-wide banking supervision was complex and would be hard to carry out, and the continent might need a US-type system with multiple regulatory entities, he said.
A fast pace toward banking union has been endorsed by the IMF and is viewed as an essential element of measures to overcome the crisis and restore market confidence in the viability of monetary union.
IMF chief Christine Lagarde said on Thursday that banking union was central to resolving the crisis.
The most obvious evidence of a rift is between the French position – which wants it to take place by the end of the year – and the German one, which pleads for more time to assess details.
Meanwhile US academic Professor Barry Eichengreen, one of the world’s leading experts on the eurozone, warned that there was little chance that the union could be put in place this year.
Writing exclusively in Emerging Markets, Eichengreen said banking union would have to absorb the cost of writing down banks’ non-performing legacy assets as debt restructuring was no longer feasible now European debt markets had been renationalized.
“The implication is that the fiscal and banking union that the eurozone needs, won’t be created by the end of the year,” he said. “Five years is more like it.”
“The issues to be resolved are contentious and difficult. They won’t be disposed of overnight. So can Europe hold it together for five more years? That’s the 64,000 euro question.”
The European Council of heads of state and government at their June summit ordered the European Commission to prepare a roadmap by December this year “to achieve economic and monetary union”.
The Commission in September said there should be a “single supervisory authority” within the European Union as a first step towards banking union”.
German finance minister Wolfgang Schauble has said key elements of the Commission’s banking union proposals on deposit insurance and supervision are poorly thought out.
There are increasing doubts the December deadline for a roadmap can be met. Borg told Emerging Markets the timetable could be met but that it was clear urgent discussions were required if a consensus was to be reached.
A team headed by Erkki Liikanen, governor of the Bank of Finland, submitted a report last week on reforming the structure of the EU banking system. It concluded that the 2008/09 financial crisis revealed “supervision and regulation of EU banks is inadequate.”
There are 6,000 banks in Europe and half of the world’s 350 largest banks are domiciled in Europe. European banks have capital equal to 350% of GDP. By contrast US banks are smaller. The Liikanen report said better supervision and several other reforms were needed to safeguard depositors and assure the viability of the EU banking sector.
Meanwhile, Lagarde said that Greece and Spain should get “a bit more time” to bring down their budget deficits.“We want to support Greece and think the EU programme countries should be given a bit more time, maybe two years,” she said.