Progress toward EU fiscal union remains slow

Updated 22 December 2012
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Progress toward EU fiscal union remains slow

Reforms in the European banking system needs to go hand in hand with fiscal reforms to support financial stability, according to a new report form Qatar-based QNB Group received here.
A recent meeting of European finance ministers yielded agreement on an initial step toward a centralized banking union and approved a 37-billion-euro bailout tranche for Greece. However, a two-day meeting between European leaders in mid-December delayed decisions on fiscal union until June 2013.
On December 13, EU finance ministers formally appointed the European Central Bank (ECB) to oversee the “single supervisory mechanism” (SSM), an initial step toward the banking union.
The agreement will give the ECB powers to take over the direct supervision of banks from national authorities.
It is expected to come into force in 2014, although no deadline has been given.
The agreement only covers 200 of the 6,000 financial institutions in the euro zone that were initially expected to be included.
It excludes banks with assets of less than 30 billion euros, or 20 percent of national GDP. This leaves most of Germany’s retail banking sector and its politically powerful savings and cooperative banks under the oversight of national authorities, a key requirement for Germany’s consent to the plan.
However, the ECB still retains the power to intervene in any bank, if required, and to deliver instructions to national supervisors.
The SSM is intended to provide transparency, rigorous oversight and standardized requirements and capital ratios across the region’s largest banks.
Once the SSM is enacted it will clear the way for Europe’s 500-billion-euro rescue fund to be used to directly recapitalize struggling banks without unanimous national approval.
According to QNB Group, this is preferable to providing the funds through national governments, which would increase sovereign debt levels. However, the SSM will require parliamentary approval from the European Parliament and from some individual member states, notably Germany, which has been reluctant to give up national oversight.
The SSM also allows the Eurozone to move to the next phase of establishing a banking union.
This will be to create a resolution mechanism to deal with winding up failing banks.
This would centralize the management of crisis resolution to ensure that it is swift and effective, avoiding the slow decision-making of multiple national governments that has drawn out the European sovereign debt crisis.
A euro zone deposit insurance framework is also being advanced but no formal agreement has been announced.
The driving force behind the banking union is to increase the stability of Europe’s financial system.
Europe has faced an intrinsic conflict of interest with national authorities overseeing banks that hold large amounts of the debt of the national governments.
This has led to “cosy relationships” between national authorities and their banks with supervisory controls that are perhaps more lax than they should have been.
Additionally, the single currency made European banks more interdependent on and exposed to each other, increasing the risk of cross-border financial contagion.
The banking union aims to bolster confidence in Europe’s banks by standardizing supervision, regulations and capital controls and improving capacity for crisis management.
This should help lower borrowing costs for banks, particularly in crisis-ridden countries in Europe’s periphery, and should also support cross-border lending, easing any liquidity issues.
However, the SSM is not as extensive as originally intended as it excludes a number of smaller banks. This is a serious shortcoming.
As the European Commission has stated, systemic risks can originate in smaller banks and a two-tier system is inherently unstable as it encourages depositors and banks to move to the segment that is perceived as safer, creating volatility.
The implementation of the SSM has also been pushed back from the beginning of 2013 to an undefined date in 2014.
According to QNB Group, reform of the European banking system needs to go hand in hand with fiscal reform to support financial stability.
To ensure more sustainable sovereign debt levels, the EU has plans for greater fiscal union with a joint Eurozone budget and for binding contracts to enforce economic reform and budget targets. However, at a European Council meeting on December 14, all decisions on these possible measures were postponed until June.
Greater fiscal and banking union are fundamental for a permanent solution to Europe’s sovereign debt issues.
Although these reforms have been pushed back, financial markets have generally responded positively with the Euro rising to three-month highs against the dollar, perhaps relieved that some material progress has been made with the banking union.
This may have helped the Euro recover in mid-December.
Also supporting the euro was the successful buyback of a portion of Greece’s sovereign debt, which enabled the release of a 37-billion-euro tranche of bailout funds on December 13.
Although the banking union should enhance the stability of the European financial system, it could also lead to stricter regulation.
The ECB may enforce more stringent capital requirements than those currently enforced by national authorities.
This could lead to further retrenchment and de-leveraging by European banks, continuing a trend that is currently ongoing.


EU to respond to any US auto tariff move: report

Updated 23 June 2018
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EU to respond to any US auto tariff move: report

  • Trump threatened to impose 20 percent tariff
  • Shares in carmakers slip on trade war fears

PARIS: The European Union will respond to any US move to raise tariffs on cars made in the bloc, a senior European Commission official said, the latest comments in an escalating trade row.
US President Donald Trump on Friday threatened to impose a 20 percent tariff on all imports of EU-assembled cars, a month after his administration launched an investigation into whether auto imports posed a national security threat.
“If they decide to raise their import tariffs, we’ll have no choice, again, but to react,” EU Commission Vice President Jyrki Katainen told French newspaper Le Monde.
“We don’t want to fight (over trade) in public via Twitter. We should end the escalation,” he said in the comments published on Saturday.
The European Autos Stocks Index fell on Friday after Trump’s tariff threat. Shares US carmakers Ford Motor Co. and General Motors Co. also dropped.
“If these Tariffs and Barriers are not soon broken down and removed, we will be placing a 20% Tariff on all of their cars coming into the US Build them here!” Trump tweeted.
The US Commerce Department has a deadline of February 2019 to investigate whether imports of automobiles and auto parts pose a risk to US national security.
US Commerce Secretary Wilbur Ross said on Thursday the department aimed to wrap up the probe by late July or August. The Commerce Department plans to hold two days of public comments in July on its investigation of auto imports.
Trump has repeatedly singled out German auto imports to the United States for criticism.
Trump told carmakers at a meeting in the White House on May 11 that he was planning to impose tariffs of 20 or 25 percent on some imported vehicles and sharply criticized Germany’s automotive trade surplus with the United States.
The United States currently imposes a 2.5 percent tariff on imported passenger cars from the EU and a 25 percent tariff on imported pickup trucks. The EU imposes a 10 percent tariff on imported US cars.
The tariff proposal has drawn sharp condemnation from Republican lawmakers and business groups. A group representing major US and foreign automakers has said it is “confident that vehicle imports do not pose a national security risk.”
The US Chamber of Commerce said US auto production had doubled over the past decade, and said tariffs “would deal a staggering blow to the very industry it purports to protect and would threaten to ignite a global trade war.”
German automakers Volkswagen AG, Daimler AG and BMW AG build vehicles at plants in the United States. BMW is one of South Carolina’s largest employers, with more than 9,000 workers in the state.
The United States in 2017 accounted for about 15 percent of worldwide Mercedes-Benz and BMW brand sales. It accounts for 5 percent of Volkswagen’s VW brand sales and 12 percent of its Audi brand sales.