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Brendan Keenan: 'Are German attitudes softening towards a stronger eurozone monetary union?'


German finance minister Olaf Scholz, seen here talking with chancellor Angela Merkel, has called for action on banking union projects. Photo: Annegret Hilse/Reuters

German finance minister Olaf Scholz, seen here talking with chancellor Angela Merkel, has called for action on banking union projects. Photo: Annegret Hilse/Reuters

German finance minister Olaf Scholz, seen here talking with chancellor Angela Merkel, has called for action on banking union projects. Photo: Annegret Hilse/Reuters

Here's a key line, if ever I saw one: "Now that the UK, home to London's capital markets, is on the verge of withdrawing from the EU, we must make real progress." Not so much what was said, but who said it.

The words were those of Olaf Scholz, Germany's finance minister, in an article written for Britain's 'Financial Times' newspaper. Brexit itself goes from bad to worse, as the UK election bids fair to make the Mad Hatter's tea party look like a symposium affair, but everyone else is starting to move on.

It looks like they may move a long way. Scholz's opinion piece represented a remarkable shift in the traditional German line on the creation of a eurozone banking union, and with it a strengthening of the euro monetary union.

The next line from Scholz said: "Being dependent for financial services on either the US or China is not an option.

"So if Europe does not want to be pushed around on the international stage, it must move forward with key banking union projects, as well as the complementary project of capital markets union."

That will give pause for thought in the City of London. His meaning is not entirely clear, but there is the implication that Britain outside the EU cannot expect to be the centre of eurozone financial management to the same extent as now.

Perhaps we should call him 'Monsieur' Scholz. Those comments seem to echo the long-held French desire to make the EU a financial entity strong enough to escape the power of the US markets and follow policies which American investors might not like.

The French drew the conclusion that only a European currency might make such policies achievable, but creating one looked an impossibility. Thirty years ago, German unification changed that calculation.

When the post-unity realities made a European currency inevitable, the Germans did all they could to make it Germanic, which created a problem.

The euro is a common currency, which ought to mean common architecture to hold it together, which would mean involving all kinds of non-Germanic folk. So many of the ideal foundation stones never got laid.

We all know what happened as a result, although Ireland seems not to have applied its knowledge to try to make sure that it never happens to us again.

Now, even German minds are coming round to the view that it must never happen again at all.

Perhaps the departure of Mario Draghi from the European Central Bank (ECB), along with the departure of Britain from the EU, has something to do with it.

Draghi was the bete noire of Berlin, although not of everyone in Berlin. He is famously credited with saving the euro when he said in the crisis that the ECB would do "whatever it takes". It was probably an empty promise because the bank cannot do whatever it wants. But it worked, and he went on to defy German representatives on the ECB by creating far more money for far longer than they believed was wise.

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All of which means that, while the euro was saved, it is still not safe. There have been changes, with ECB supervision of banks, an agreement on how failed banks should be rescued and even a fund to help with the costs. But it is all small change.

The 'doom loop', where failed lenders bankrupt their national government, as in Ireland, is still a threat.

Banks are healthier than they were in 2007 and the failure of one that is too big to rescue looks unlikely at present. But not impossible.

Dealing with that reopens the arguments which characterised the euro's birth 20 years ago, and have continued ever since. At its core, it has nothing to do with a single currency as such. It is instead German fears that the value, and even the amount, of their savings could be put at risk by profligate countries.

To an extent, that is what happened in 2010, although the profligates had to pick up most of the bill themselves. That left neither side happy - the Irish and others believing they had been unfairly treated, with the Germans and fellow creditors thinking they had been taken advantage of. Scholz is shifting the ground, not just to ensure it does not happen again, but because a vulnerable euro and an EU with no pre-eminent financial centre on its territory will weaken Europe's international position.

What he calls "no small step for a German finance minister" involves acceptance of the idea of some form of deposit insurance, on top of the national guarantees now required of member states.

It would not be unlimited, and the assistance would be in the form of loans rather than capital. National treasuries could still be exhausted covering the losses of bondholders in failed banks. The possibility of some loss-sharing once the banking union is a complete being is as far as Scholz is prepared to go.

Instead, more would have to be done to reduce the risk of bank failure. In particular, banks in the more stressed countries would have to reduce their exposure to their own governments' debts - something which will not go down well with the governments in question.

One particular government will note his view that a stronger monetary union requires tax harmonisation.

Progress on a banking union must not lead to "competition-distorting tax arrangements" and will need uniform taxation of banks in the EU, he says.

This is in addition to the further tightening of borrowing rules for member states, which every German politician feels obliged to include in their proposals.

The terror of someone else's debt landing on their table is the reason Scholz's earlier suggestion of some kind of EU unemployment assistance was shot down at once by chancellor Merkel's party.

It is also why there is no mention of any kind of bonds backed by the whole eurozone in his new proposals.

Outside of Germany, few analysts think the euro can be made safe just by having safer banks, but without any risk or loss sharing, whether by direct transfers or the creation of common debt.

If they are right, the kind of safety mechanisms proposed by the finance minister will in the end turn out to be extremely dangerous. They may postpone another crisis, but will be even more inadequate to deal with it when it comes.

The European currency covers a wider range of economic performance in its member states than does the US dollar.

What Scholz and others call distortion of competition could equally just be called competition. They seek arrangements where the kind of competitive advantage their countries enjoy is allowed, and the kind which threatens them is not.

It is far from being only a question of multinational taxation. Almost everything, from working hours to water purity, has implications for the opportunities for less productive countries to catch up with the more successful.

The core EU philosophy that harmonisation means everyone doing things the same way is not a sound basis for a sprawling monetary union.

Scholz, along with the European Commission, the OECD and the IMF, is right to say that the less productive economies need greater reform of their internal markets and procedures. But if they achieve it, they are entitled not to run into more of the non-tariff barriers represented by many existing regulations, and the policies espoused by the richer countries.

One must start from where one is, of course. Scholz's views do represent a new start. It remains to be seen how far they get, even at home.

They can be seen as aimed mainly at the Social Democratic party, where he is standing for the post of joint leader.

On the other hand, the appointment of doveish economist Isabel Schnabel to the ECB might be a sign of changing government attitudes, after bitter internal bank battles and growing media hostility.

It may be coincidence but one might even be tempted to link the appearance in another London financial publication, 'The Economist', of French president Emmanuel Macron, talking about the implications of Britain's departure for defence and EU integration. Long-stalled plans in these areas will have to be accelerated, he says; just like Scholz on the euro. Brexit is not just for Brits.

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