26th Oct 2016

IMF: politics could wreck EU bank union plan

  • Greek demo. IMF: 'adjustment fatigue' poses risk for the EU's anti-crisis efforts (Photo: endiaferon)

The International Monetary Fund (IMF) has warned that political angst could harm EU plans to put the safety of its banks beyond doubt.

The Washington-based institute outlined the fears in its World Economic Outlook report out on Monday (8 October).

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Its chief economist, Olivier Blanchard, wrote an upbeat preamble to the 229-page survey, saying "there has been a clear change in attitudes" in Europe and that "one can reasonably hope that the worst might be behind us."

But the study said that if EU anti-crisis measures, such as the banking union, are not put in place right away "the forces of financial fragmentation [will] increase and become entrenched, capital holes in banking systems [will] expand and the intra-euro-area capital account crisis [will] spill outward ... [with] deleterious consequences for the rest of the world."

Amid mass-scale anti-austerity protests in Greece, Portugal and Spain, it added that "rising social tensions and adjustment fatigue ... raise doubts about adjustment in the periphery."

Nodding toward euroscepticism in northern EU countries, it also said "the commitment of others to more integration" is open to question and that "policy makers need to build political support for the necessary pooling of sovereignty" that the anti-crisis plans entail.

The IMF's vision of an EU banking union tallies with recent European Commission proposals to create a single EU bank supervisor.

But it said the scheme must go further to stop European savers and investors from stashing their money in safe havens and to stop failing banks from dragging down their home countries.

"Banking union also requires a pan-European deposit insurance guarantee programme and a bank resolution mechanism with common backstops," the report noted.

It added that the two measures are "critical, and proposals for them still need to be spelled out."

Going back to his preamble, Blanchard noted that the move would amount to "a system of transfers" from rich eurozone countries to poor ones.

The IMF predicted that even if things go well, combined eurozone GDP will contract by 0.4 percent in 2012 before growing by 0.2 percent next year (a gloomier outlook than it had in July, when it forecast a 0.3 percent contraction and a 0.7 percent rebound).

But if EU reforms go badly, it said that even Germany will see its GDP shrink, while Italy and Spain will see up to 7 percent of their economies go up in smoke, instead of between 1.5 percent to 2.3 percent.

For his part, Benoit Coeure, a member of the European Central Bank (ECB) board, in a speech in Frankfurt the same day, backed the IMF bank union model.

"A common resolution fund would decrease the too-big-to-fail problem and thus reduce moral hazard ... Finally, depositors would not need to consider shifting their funds across the continent in search of a safe haven, as all banks would offer the same insurance coverage," the French economist said.

"To ensure that money is sound, and, in the euro area, that it is 'single,' we need the banking system to be equally sound, and importantly, single," he added.

"Banking union is ... [a] logical extension of the Maastricht Treaty [a foundational EU document], both in historical and political terms."


Europe ready to tackle Greek debt relief

The Greek government has built and broadened alliances in EU institutions and member-states that acknowledge the need to restructure the debt and deliver another economic model for the eurozone.

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