Much criticism has been directed at Friday’s agreement in Brussels among the European leaders to make the European Central Bank the bloc’s financial supervisor, mainly for the slow pace at which it will be implemented. But the agreement that will bind the 17-nation monetary union more tightly via a central bank oversight body could also be considered an indicator of the durability of the euro zone. It comes after months of band-aid bailouts for the zone’s indebted states that had doomsayers, especially in the Anglo-American world, constantly predicting the demise of this unique experiment in economic cooperation.
The importance of the oversight institution is that it will enable troubled banks to directly access bailout funds without depending on governments to bail them out and triggering sovereign debt crises. Given that it will oversee some 6,000 banks, many critical details of the new institution still need to be worked out. For a start, the legal framework is unlikely to be in place before January 1 — another summit is due in December — and analysts reckon that full operations are unlikely to begin before 2014. Unsurprisingly, these delays are principally the result of some serious backroom wrangling between German Chancellor Angela Merkel and France’s President Francois Hollande. In the main, Mr Hollande has accused Ms Merkel of going slow for political gain — she faces elections next year. Certainly, the German establishment’s insistence on savage budget cuts by indebted nations in return for bailouts has been the focus of serious discontent among the “Club Med” debtor nations. Ms Merkel, in turn, is pressing for a closer fiscal union via a separate “budget czar” who will have veto powers over euro-zone nations’ spending plans, an issue Mr Hollande is hoping to deflect.
To be sure, an oversight body is a partial, if important, solution to the euro-zone crisis. It will help take private bank indebtedness off sovereign balance sheets — an outcome that will be hugely useful to countries like Ireland and Spain. But the endemic problem remains for countries like Greece. Despite multiple bailouts, which included bond-holders taking substantial haircuts in return for deep spending cuts, Greece’s debt-to-GDP ratio stands at 165.3 per cent and unemployment has been stubbornly high at 21.7 per cent. Despite cutbacks, Spain and Cyprus were forced to request assistance from the euro zone’s bailout funds in June to recapitalise regional banks with large exposures to real estate. The ECB’s support for countries involved in sovereign bailout programmes through Outright Monetary Transfer in September this year is one indication that the crisis is yet to abate, as are the high interest rates at which governments are being forced to borrow. Growth, rather than austerity, is needed.
Still, the very fact that 17 states, among whom relations are not always cordial, were able to agree to an external body monitoring their banks suggests that predictions about an imploding euro zone are misplaced. If there is a lesson, it lies in the contrast between the constructive and energetic action for a solution in Europe and the wilful stasis over Goods and Services Tax in India.