Eurozone’s future, banking union, bail-in instrument and the rise of populism in Europe. We talked with Michel Barnier, EU Commissioner for Internal Market and Services. Now that the emergency is over, the Eurozone needs to be rethinked. The euro area needs reforms such as the Member States, but the path is uncertain and anti-euro sentiment could restrain the roadmap to the next EMU. However, there are some good probabilities that the next Eurozone will be stronger than ever.
After two difficult years, the situation in Eurozone is back to normal. International investors’ confidence is increasing, financial fragmentation is decreasing. Yet, the EMU needs to be rebuilt in order to become stronger; the current monetary union seems to be a failure. The banking union is the first step, but the roadmap is too slow. So, how will be the next EMU?
In the short-term, we need to continue to strengthen the governance of the Euro zone. This is what my colleague Olli Rehn is doing and we have made enormous progress. As a necessary complement to the reforms on the governance side, we need to construct a solid financial system. This is what I am doing, with the construction of a banking union, with more uniform, centralised and predictable arrangements for the supervision and resolution of banks. We have reached agreement on a Single Supervisory Mechanism and the establishment of the European Stability Mechanism last year, and now we are in the process of putting in place the Single Resolution Mechanism to deal with failing banks with a minimum involvement of taxpayers’ money.
What shape the EMU will have in 2020?
What about the broader economic union? Where should we go from here? Some difficult choices will have to be made. Any steps towards increased solidarity and mutualisation of risk would have to be combined with increased responsibility and discipline: that is, with further sharing of sovereignty and deeper integration of decision-making.
Solidarity is one of the fundaments on which the European Union is founded. Solidarity goes hand in hand with common responsibility. The euro-area in 2020 also be shaped by its members at that time. The euro area is not a private club, far from it: Latvia is set to join in January, and Lithuania has expressed its wish to join in 2015. But that said, we also need to stay vigilant against any attempt to fragment the internal market.
Regarding the Single Resolution Mechanism, bail-ins seem to be the most important instruments to break the vicious circle between States and banks. We have seen what happened in Cyprus, now the ECB Asset Quality Review play a key role as it is the only way to fully restore confidence. What are your expectations regarding the bail-in model?
From the start, I have insisted that we must be serious about ending public bailouts of banks. I don’t want taxpayers to continue paying for the banks’ mess. To the furthest extent possible, bank losses must be covered primarily by the owners of the banks and their investors, in a clear and predetermined order. This is what we mean when we talk about bail-in. If despite the bail-in of shareholders and creditors, some additional money is needed to resolve the bank, it should come from pre-financed funds to which banks themselves have contributed in advance. My feeling is that there is a consensus around these principles and I am sure we will be able to work out the final details.
What about the fears of depositors?
For their part, depositors will continue to have full protection of their deposits up to 100,000 euros even when a bank runs into trouble. The status of uninsured depositors (deposits over 100,000) is still subject to discussions. The likely outcome is for depositor preference – which I fully support – and this would ensure that they only contribute to the cost of resolution after other senior creditors.
Turning to financial regulation; after the collapse of Lehman Brothers, regulators have not reduced risks but merely transferred them. This is the case of the shadow banking system. Every financial actor uses this system for funding needs and to increase liquidity, but the possibility of a shock is around the corner. How can this issue be addressed? Will the regulation of OTC markets increase?
For the past five years, we have set an ambitious course to repair the financial sector, to restore confidence and stability in the markets. We have proposed 28 new regulations for the financial sector. Many of them have been agreed, others are in the final stages of negotiations. These rules include laws for banks, hedge funds, OTC-derivatives, credit agencies and many other areas.
It is true that increased rules for the banking sector may make certain banking activities move outside the regulated sector. This is what we call shadow banking. Some parts of this sector are already regulated by our rules, other bits are not.
That is why I made proposals only a few weeks ago to ensure that risks do not accumulate in the shadow banking sector, by putting forward rules for money market funds and outlining some further ideas about possible measures for the shadow banking sector. the aim is to ensure that all financial market activities are transparent and that the benefits achieved by strengthening certain financial entities and markets are not diminished by the risks moving to less highly regulated sectors. This is a global issue and we are following closely the work being carried out on this matter at the international level. Finally, we need to watch out for the interaction between banks and the shadow banking sector.
One of Commissioner Barnier’s most discussed proposal was the possibility of creating a EU rating agency. Now that financial stress is under control, is the set up of this agency likely or is it not a priority?
We now have in place a strong regulatory framework for credit rating agencies so that they are better supervised, more transparent, and provide high quality ratings. The latest rules have just come into force.
The creation of an EU rating agency is an idea we have been examining for several years. Whilst the idea is interesting as such, there are certain drawbacks. First, its potential costs: an impact analysis showed us that creating such an agency would cost around 300 to 500 million euros. But more importantly, if such agency were to focus on the rating of sovereign debt of member states, there is an obvious risk around independence and credibility.
Stakeholders are divided on the matter. However, as part of the new regulatory framework, the Commission has committed to review the situation in the rating market and report to the European Parliament and the Council on the appropriateness of the development of a special European system for creditworthiness assessments of sovereign debt. By 31 December 2016, the Commission should submit a report to the European Parliament and to the Council on the appropriateness and feasibility of supporting a European credit rating agency dedicated to assessing the creditworthiness of Member States’ sovereign debt and/or a European credit rating foundation for all other credit ratings.
Last, but not least, next year the EU elections will take place. The anti-euro parties may be stronger than ever in the next European Parliament. Should we fear a populistic outcome?
Yes, I think there is a real risk of a rise in support for populist parties at the 2014 European elections. The current economic crisis is an ideal backdrop for a surge in such parties. We see that happening in many countries across our continent.
To me, the response to this problem lies partly in our policy response to the crisis. Populist tendencies are on the rise mainly due to the social consequences of the economic crisis. Of course, people don’t care about banking legislation, they care about jobs and growth. But these issues are linked. If we get the financial sector back on its feet so that the banking sector does what it is supposed to do – financing households and the real economy – citizens will regain confidence to spend and invest and companies will have the means to expand, invest and employ new people. This is the path to sustainable growth. This spring, we launched a public consultation on what Europe could do to encourage long-term and SMEs financing and one striking response was that was matter most is to re-establish confidence in the European economy.
And we have to become much better in involving the citizens in the decision-making. We already do public consultations, public hearings, conferences and bilateral stakeholder meetings. But we can do much more. I am in favour of more innovative, informal ways of asking citizens for their opinions on policy proposals, and interacting with them directly, as my colleagues and I did during the “Single Market Month” this year, where we collected 800 policy proposals directly from citizens, and debated their questions live in over 80 online chat sessions.