Germany has removed one of the barriers it had erected to euro zone banking union. The 17 finance ministers of the monetary union agreed on June 20 to allow their euro 500 billion European Stability Mechanism to recapitalise directly the banks of needy member states. That can be taken as a reassuring sign of Chancellor Angela Merkel's pragmatism.
The agreement has two key benefits. Having a central pot of money will help ease the vicious 'doom loop' whereby cash-strapped governments cannot afford to bail out swollen banking systems. ESM bank-dedicated funds could also potentially be used to ease the debt burdens of bailed-out countries like Ireland - although that is still shrouded in a cloud of ambiguity.
In an election year, committing to underwrite blank cheques to other euro zone countries is bound to raise German hackles. That may be why several safeguards have been put in place. Member states with banks whose core Tier 1 ratios are below the new legal minimum of 4.5 per cent will have to supply the first slug of recapitalisation money themselves. Alternatively, 20 per cent of any capital put in above the minimum will have to come from the country's coffers. Germany has insisted that the total funds available for bank recapitalisations be limited to euro 60 billion, less than the ESM's callable equity of euro 80 billion.
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Nervous depositors, mindful of the brutal bail-in of Cypriot depositors in March, may ask what happens if a big bank collapses before the ESM is ready. But the European Central Bank's commitment last year to buy the bonds of struggling member states has succeeded in bringing sovereign yields down to manageable levels, giving national governments more leeway to deal with their own problems. And since protecting German taxpayers from further euro zone expenses is a key political factor in the forthcoming election, it is encouraging that Berlin remains keen on bringing the bloc closer together.
