Slow but real progress on resolving eurozone crisis

by Jean Pisani-Ferry

Financial Times
December 17, 2012

Last week’s summit of European leaders as well as finance ministers marks an important step in completing the eurozone architecture. At the same time, the summit’s results fall short of what could have been hoped for.

Start with banking union. When launched on 29 June, the project was widely and rightly interpreted by markets to indicate that Europe’s leaders had changed their assessment of the euro crisis. Until then eurozone heads of state had behaved as if a mere tightening of the existing budgetary provisions could suffice to restore confidence in the euro. But in June they recognised that the arrest of financial flows within the euro area had deeper roots. Banking union was designed as the first component of a systemic response to a systemic problem. Together with the announcement by the European Central Bank of a new bond-purchase facility, it was instrumental in convincing markets that the worst was not certain.

Last week finance ministers agreed on the first important step towards banking union: the establishment of a single supervisory mechanism (SSM). The compromise they have reached seems to be a good one. The ECB will be in a strong position and responsible for the overall functioning of the SSM. It will have direct oversight of eurozone banks in a differentiated way depending on size. The size threshold of €30bn means that perhaps 85 per cent of assets and more than 180 banks in the eurozone will be under direct oversight of the ECB. The press communiqué suggests that ECB will also have the right to scrutinize banks below the threshold, which will reduce banks’ incentives to fall below or above the threshold. This is important to avoid competitive distortions but also to prevent major problems among small banks, which taken together are still large. Moreover, when financial assistance is given, the ECB will be the supervisor which allows extending the coverage to a number of Spanish Cajas that are smaller in size than €30bn. The compromise also appropriately allows non-eurozone countries to participate in the SSM.

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