‘Billy No-Mates’ Cameron has More of a Common Interest With Brussels than He likes To Admit, Says Michael Wilson
Note: The following article was written before the proposed tightening of EU sanctions against Russia following the downing of the Malaysian airliner on 18th July over Ukraine. An issue which has driven a political wedge between Germany (which fears losing its Russian gas supplies), France (which has a valuable contract to build warships for Russia), and other Western EU nations which are broadly in support of tougher sanctions. Arguably, the issue has given Mr Cameron a more decisive role, in which sense it has proved timely.
“A bad day for Europe.” As David Cameron declared it last month when Jean-Claude Juncker, Luxembourg’s very own Grey Suit, was finally elected to Europe’s top job – in open defiance of Britain’s demand that the president of the European Commission should have been appointed by the people, or at least by the European Parliament. And not by the combined Snouts of the Round Trough that he seemed to think Brussels had turned into.
Unfortunately, the fact that Cameron’s “cowardly” allies had deserted him almost to a man – leaving him facing a 26-2 defeat with only Hungary’s rather dodgy prime minister Viktor Orban for company – only made the humiliation worse. Instead of the campaigning, imaginative outsider who Britain really wanted in the job, we got a long-time Brussels insider who knew not just the corridors of power, but also the shady back staircases where the real dirty dealing was conducted.
Nearly Bounced by the Euro Club
So did Cameron have a point? Well, you can understand any paranoid tendencies that he might have displayed. It isn’t so very long since Britain faced the very real possibility of being bounced into another dastardly eurozone conspiracy, in the form of the uniform European financial transaction tax (EU FTT), which would have punished London with levies on just about every securities transaction that took place in the city – all share trades, all derivatives transactions and, goodness, practically everything other kind of transactions too.
I mean, if the sprawling legislative reach of off-topic Euro Club interests could go that far in setting the European agenda, what else might the evil swines have in store for any nation plucky enough to stay outside the euro? The Prime Minister was within his rights to ask.
The FTT Mess
As it happened, it was hard to disagree with Britain’s view that the ill-fated FTT would have been a bad thing – if only because so much of London’s business is with non-EU nations that it would simply have ended up scooping up money from all around the world and funnelling it back into the EU coffers. The levy would have cheesed off the Americans and the Japanese, and it might have crippled London’s standing in the derivatives market. That would have made an envious Paris and an underrated Frankfurt very happy, but it wouldn’t have done much for cross-Channel harmony.
Fortunately for Mr Cameron, the FTT task was made easier by the fact that the dastardly eurozone conspirators couldn’t agree between themselves on how much to charge and who to charge it to. So the project was swiftly supplanted by a private eleven-nation deal that was supposed to have gone into action last January but probably won’t happen now until 2016. Phew, we can breathe again.
There wasn’t very much more encouragement to be drawn from the tortuous process that had finally led to the delayed decision on implementing the Markets in Financial Instruments Directive (MiFID) – a sort of pan-European answer to RDR that aimed to establish uniform standards of consumer protection in all parts of the European Union, but with various bells and whistles attached, and with more regulatory grunt behind it. (MiFID II outranks RDR and might have made it redundant, were it not for the fact that the two projects concur on many subjects.)
But not, scarily, all of them. For an anxious two years, Mr Cameron was forced to deal with the very real possibility that the MiFID monster in Europe’s basement might decide to ban execution-only trading for anyone who didn’t happen to be a sophisticated investor. Forget about minor matters like Ucis – this would have practically outlawed quite a lot of what we Brits regard as our sovereign liberties.
But fortunately, that idea too was destined for the big round filing cabinet. When the European regulators finally drew up the final version exactly a year ago, there was nothing much in it apart from some commonsense rulings on marketing and consumer guarantees, plus some controls on ‘dark pools’ and high frequency trading.
Don’t imagine, though, that MiFID II has seen the light of day yet. Last year’s agreement on the final draft might have been two years overdue, but it still won’t be ready for rubber-stamping for another couple of years yet. That’s Brussels’s preferred way of working, and on this occasion it didn’t work out so badly for Mr Cameron, who would rather the whole thing had carried on slumbering in its squalid basement for as long as it took to win the next UK election.
Better News On the Banking Front
Meanwhile, whether we appreciate it or not, the European elite – including, yes, Mr Juncker himself – have not made a bad job at all of rescuing the eurozone from its self-imposed crisis. It’s become customary to slate the European Central Bank’s performance, but it stands up to closer inspection surprisingly well.
You won’t need reminding that the 2008 financial crisis left Europe in somewhat more of a mess than almost anywhere in the developed world. From Portugal to Cyprus, from Dublin to Athens, the plight of the PIIGs came horribly close to government-guaranteed meltdown. And although the specific causes were various, what it came down to in most cases was that an awful lot of government debt was parked with the same countries’ banking institutions which hadn’t wanted to buy the bonds but had had no option, because that was what banks were supposed to do, dammit. There were other complications, such as the fact that French institutions seemed to be carrying a scary amount of Greek and Cypriot debt, but that seems a mere quibble.)
And that the impact of what might well have become non-performing loans had been enough to put the skids under the very adequacy of the aforementioned banks. And that the ECB had been technically powerless to intervene because, unlike any other central bank you can name, it did not have the mandate to issue bonds.
If that seemed like a dangerous anomaly at the time, it might have been a useful factor in retrospect because it forced Germany’s bankers into a hard-headed reassessment of how they viewed their spendthrift southern counterparts. Greece’s urgent need for aid clashed with Germany’s folk-memory of hyperinflation in the 1920s and 1930s – resulting in a flat refusal to sanction the issue of eurozone bonds in the name of what Germans saw as their role as the locomotive of Europe – sober, unadventurous, risk-averse and generally everything that Greece and Portugal wasn’t. For a while, deadlock threatened.
PIIGs Can Fly
Looking back, it’s rather hard to say exactly why all this should have been sorted out by ECB president Mario Droghi’s declaration in July 2012 that he would do “whatever it takes” to rescue the euro. Perhaps it was the threatening tone of voice that Mr Droghi adopted, or maybe it was his dark and vaguely threatening addition – “and believe me it will be enough” – to convey that he meant business, and that anyone who doubted him might as well have been wearing concrete boots.
Whatever it was that Mr Draghi did right, he did it very right indeed. The ferocious undertone of his statement was enough to send petulant Greece’s government whimpering back to the grindstone where it needed to be. Portugal, Ireland and eventually Cyprus whipped their bankers – and, in some cases, their bondholders – into a more serious frame and mind, and somehow things started to work again. By last year, the PIIGs were starting to return to the bond markets without fear of being humbled by sky-high coupons. By the start of July 2014, ten year Greek bonds were delivering yields of 5.9%, Portuguese paper was worth a paltry 3.6% and Ireland was running at 2.35% – actually slightly less than gilts. And if that isn’t a wake-up call, I don’t know what is.
Either way, the European fiscal situation has stabilised massively. And without the need for Draghi to come good on his plan to raise Eurozone bonds through the ECB. That in itself would have been a monster task, because it would have required enabling legislation from every single Eurozone nation, and it would have taken longer than the world could afford to wait. A first-class job, then, and well done.
And So Toward Banking Union
Freed in this way from the need to actually do any bailing out – and hence, by extension, to find the legal wherewithal for issuing Eurozone debt – the ECB has been able to focus on the more worthy task of sorting out the banks themselves. And this year Europe has come one step closer to making a difference.
April brought approval from the European Parliament for three key planks of banking union, which collectively amount to a substantial shift of power toward the EU – and, conversely, away from the various national governments and financial supervisors. And the new legislation, which is scheduled for a phased introduction beginning in 2015, will change things not just for the euro zone countries but also for any other EU members who might wish to join. (Hmmm, that’s Britain ruled out, then.)
Between now and 2025 (good grief), the grand project that will unfold in Europe will force governments to set up proper deposit guarantee schemes that will ensure you get your money back within seven days if your bank goes belly up. About €44bn in new deposits will be required.
Another provision takes the task of folding an insolvent bank out of the national government’s hands and places it with a new EU body. The so-called Single Resolution Mechanism was deemed necessary because some member governments behaved irresponsibly in 2008, or because they favoured their own citizens above foreigners.
- A third provision finally settles the question of how much of the pain shareholders and bondholders should carry before public funds are employed in a bank bailout. The innovation in this Bank Recovery and Resolution Directive won’t change things for shareholders, because they’re already in line for the losses; but bondholders won’t be so happy.
Now, about those bank bailouts. They’ll only be allowed if the EU approves. When a bank fails, the first 8% of the firm’s liabilities must be carried by shareholders and bondholders. And where a country has opted out of the banking union, it must build up its own resolution funds.
Will it work? Not at first. It’s estimated that the total resolution funds required will still be as low as €55bn after eight years have passed – although they’ll carry on growing till 2025. Now, compare that to the €600bn that European governments spent on rescues in the financial crisis of 2008-09, and you’ll observe a gap. A big one…..
The System’s Squishy Durability
But the welcome that the outwardly prickly Mr Cameron got from some of his fellow European leaders after the summit was notable for its warmth. No, of course we don’t want to lose Europe’s third biggest economy, gushed Angela Merkel. Well, indeed so. And in an age when Washington looks increasingly uninterested in its European allies, where would Britain turn if the bloc that buys 0% of its exports ended up behind a trade and tariff wall?
But my guess is that a subtler game is being played. Europe’s leaders are old hands at public fallings-out and private solidarity. A ‘hypocritical’ tendency which enraged Mrs Thatcher, certainly – but which has also helped to create a more robust and shock-tolerant European system than the European rejectionists appear to recognise. The prime minister would do well not to underestimate its slightly squishy durability.