Nein, Danke

Austria’s compromise on European deposit insurance irritates Berlin

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Three words to turn that smile into a frown: European deposit insurance. Source: Reuters

German officials are consistently against anything smacking of mutualization in the European Union because for them it means Berlin eventually picking up the tab for other countries’ bad behavior. The country opposes mutualization of debt in euro bonds, of risk in bank bailouts and of liability in a European deposit insurance scheme (EDIS).

So Finance Minister Olaf Scholz and other Berlin officials were more than a little irritated when Austria, which as a rule dutifully falls in line with whatever its German-speaking big brother decides, broke ranks and came up with a variation on EDIS that it thought could pass muster.

Vienna’s proposal for a hybrid scheme involving national and EU entities didn’t surface in last week’s informal meeting of EU finance ministers but could still make it on the agenda for the official council meeting in November. Austria currently holds the six-month rotating presidency for the ministerial council meetings.

Berlin walking a fine line

The coalition government in Berlin is walking a fine line between keeping France and other EU members happy with measures toward greater fiscal integration, and political opposition in Germany toward anything that exposes taxpayers to the lax fiscal discipline in the likes of Italy and Greece. Political resistance comes from the opposition Free Democrats and the euro-skeptic Alternative for Germany, but also from the Bavarian wing of Chancellor Angela Merkel’s own center-right alliance.

As a result, Germany has put the brakes on an EU-wide deposit insurance until banks purge their balance sheets of the bad loans they still carry from the financial crisis. The risk of these banks needing a bailout is simply too great for Germany to make common cause in protecting their depositors.

But Ms. Merkel’s lukewarm concessions to French President Emmanuel Macron on a special euro-zone budget and an expanded role for the European Stability Mechanism have put opponents on guard.

“While the government is always placating and appeasing, behind the scenes there is a lot of work going on to mutualize the deposit insurance system,” said Florian Toncar, financial policy spokesman for the Free Democrats in parliament, when Vienna floated its proposal. “The government must explain to the public whether it is participating in this and where it stands on Austria’s current proposals.”

Hybrid proposal ignores German concerns

The Austrian proposal called for national deposit insurance schemes to be funded at 0.4 percent from national budgets. Once these are fully funded, member countries would pay additional funds into a European insurance.

In the case of a bank failure, the national insurance would be first in line to pay off depositors, and the European insurance would only kick in once that was exhausted. If even the resources of the European insurance were insufficient, then other national insurance funds could loan it money.

Whatever its merits, however, this proposal doesn’t address the main German concern about existing bad loans on the banks’ books. Nor is Germany alone on this issue. Several other northern European countries share its reservations.

“We can’t begin to discuss EDIS before we have made sufficient progress toward reducing risk,” Finnish Finance Minister Petteri Orpo told Handelsblatt.

Similarly, Germany wants limits set on how much government debt a bank can take onto its books. It also wants to require banks to set aside capital against these government bonds. Italy fiercely opposes this requirement because the highly indebted country fears it will significantly increase its borrowing costs. There seems to be little chance these issues can be resolved ahead of the December summit of EU government heads.

Ruth Berschens is Brussels bureau chief for Handelsblatt. Jan Hildebrand is deputy bureau chief in Berlin and reports on financial policy. Darrell Delamaide adapted this article into English for Handelsblatt Global. To contact the authors: berschens@handelsblatt.com and hildebrand@handelsblatt.com.

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