June 11, 2012
The parallel announcement Sunday June 10 by the Spanish Prime Minister Rajoy and EU Commissioner Oli Rehn that the Spanish government would ask for an EU support up to € 100 billion to recapitalise and restructure its ailing banks has been received with great relief by the political and financial class across the world and provoked a boost of share and bond prices Monday June 11.
The basic scenario – conference among EU finance officials during a weekend – has been in line with the traditional pattern of EU crisis management, with the difference that this time a multiple telephone/video conference avoided officials from travelling to Brussels.
Prime Minister Rajoy has presented the request as a victory for Spain, the EU and the Euro. But this is a misrepresentation. He could have had this result at a lower cost if he had not waited until the last minute, pressured by his Euro area colleagues.
The lingering Spanish banking crisis had been known for many months. It was bound to come in the wake of the extraordinary real estate speculation for which the Spanish Socialist government bears the responsibility. The new Conservative government should therefore have tackled the banking sector immediately after taking office last fall.
It should have made a request for support from the EFSF months ago. Such a request would have been possible without any onus for Spain, thanks to the possibility for the EFSF to lend to governments for bailing out seriously troubled banks without a engaging in a comprehensive national reform programme.
The first lesson is therefore: act rapidly and quell the fire before the flames are too high!
Second: ignore national pride and act discreetly!
European governments have to learn to co-exist in a union of solidarity and mutual responsibility and not to be ashamed to appeal for help when they get in trouble.
Third: Europe needs a very efficient powerful banking supervision. In Spain it has failed in preventing banks from excessive investments in speculative housing.
Spain not being the only EU country where the banking supervision has failed in recent years, the EU will have to reinforce EU-wide banking supervision for all major banks, including the power to replace CEO s and, in extreme cases,close institutions.
This will have to be one of the two key components of the “banking union” that political leaders in the Euro area have started calling for, the other one being an EU – wide deposit insurance system that would avoid the tax payer from bailing out banks.
The EU Commission has submitted a draft directive to that end; and the European Council, June 28/29, will no doubt send the appropriate signal for the 17 Euro area members to proceed toward that objective which should be achieved before the end of the decade.
The turbulence of the Spanish banking sector will therefore most likely produce a long-term beneficial effect for the stability of European banks and a more effective governance of the financial sector.Author : Eberhard Rhein