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reflections

Dec 1, 2015 | 01:52 GMT

5 mins read

Germany Prepares for Another EU Battle

(Stratfor)
It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.

An article in this week's Der Spiegel revealed what would likely be the next steps in the slow-burning confrontation between Germany and the European institutions. The battle is being waged over deposit insurance, the controversial third step of the EU banking union. (The less divisive first two steps — single supervision and single resolution — are already well underway.) The report claimed that Germany feels strongly enough about the subject that it would be willing to form a blocking minority among the European states and halt the idea by official means at the next European Council meeting on Dec. 17. This would be a rather drastic action, since it would lay the union's differences bare for all to see. In fact, the matter was pushed back to the December meeting from September for fear of just such a scene.

But it is the second half of the short article that is more important, because it claims that Germany should find it fairly easy to form the quorum needed for this kind of blocking minority. According to the article, Germany could count on the support of Italy and France, which would not want to act against Germany's wishes, as well as some of the usual hawkish Northern European suspects — the Netherlands, Austria and Finland. This is notable because Italy and France are supposed to be the leaders of the pro-deposit insurance lobby, since it is an opportunity for them to gain the security of having Germany underwrite their banking systems. This should be particularly attractive to Italy, which recently has had to perform emergency surgery on some of its less-than-stable banks. Moreover, if Germany, Italy and France — which jointly make up about 66 percent of the euro area's gross domestic product — are all on the same side of a eurozone issue, who could possibly be against them?

The answer is the European institutions. The latest iteration of the banking union schedule came from the so-called Five Presidents' Plan, which was released jointly in the summer by the presidents of the European Commission, European Parliament, European Central Bank, Eurogroup and the European Council and is the next step in Europe's integration plan. Of course, this is just the institutions doing their job; the ultimate goal of the European project is still total integration, and so it is the presidents' responsibility, as the project's stewards, to advance toward that goal wherever possible. The added bonus for them is that every success makes them a little bit more powerful, as the institutions gain more and more control over the whole. For example, the banking union serves to bring the banking system under the purview of the European Central Bank rather than the national governments.

The problem comes for the institutions when their mission butts up against determined national resistance, because it shows the limits of their powers. Despite attempts to empower the institutions as much as possible — such as gradually giving the European Parliament more oversight responsibilities and implementing a new leader election system to make the European Commission more democratic — Europe's national leaders have defended their own powers pretty effectively. The ultimate arbiters of any dispute will still tend to be a collection of national leaders at the European Council, not a Brussels bureaucrat motivated solely by the European Dream. Thus, the way these institutions usually work is by attempting to coax, cajole and tempt enough national leaders into a joint position so that this is then the majority opinion. This is broadly what happened with the Greek crisis over the summer. This is why if the national leaders are on one side of an issue and the institution heads are on the other, there can be only one winner.

Despite attempts to empower European institutions as much as possible, Europe's national leaders have defended their own powers pretty effectively.

But if the reports of Germany's blocking plans are true — and Germany is likely to get its way on the issue by either tempering or postponing the measure that is on the table — what does it mean for Europe in the bigger picture? First, it will complicate the plan for the banking union. One of the main problems behind the 2011-2012 sovereign debt crisis was diagnosed as the European banking system, and more specifically the "doom loop" that tied the bankrupt banks to their own bankrupt sovereigns. The banking union was intended to solve this problem by sharing the risk laterally across the union instead of upward to the national sovereigns. Failing to do so leaves Europe vulnerable to a repeat of the types of dramatic scenes of a few years ago, with weaknesses in the banking system (which still has double the levels of nonperforming loans as its U.S. counterparts) liable to leap upward once more to their sovereigns.

Moreover, Germany's objection would be a blow to the overall momentum of integration, since it would hold back one of the major mutualization plans that was supposedly underway. Europe has long been constrained by the fact that it is a monetary union without a fiscal union — the countries are tied together by currency but not necessarily fully committed to one another — and the banking union is another element of achieving that fiscal union. Holding that back pushes the ultimate goal even further away.

Finally, there is the public relations aspect to consider. After a year of crises — Greece, Ukraine, a migrant crisis and now a major terrorist attack in Paris — the ties that bind the European Union have been put under severe strain. Moving forward with a banking integration plan would deliver a message of unity, just as other flagship projects such as the Schengen Agreement appear to be faltering. A failure to agree on this just adds another subject to the list of problems for the European Union and more distance within the bloc.

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