Hungary undermines financial stability reporting

Reuters reported this week that the Hungarian government is investigating the Hungarian Central Bank for giving financial stability data--on banking activities--to the IMF. The charge is that data on banks constitutes a business secret. National resistance to cooperate and provide information is the key factor that killed off hopes that the European Banking Authority would be able to provide for financial stability in Europe. The same is true for hopes that the ECB, as a single banking supervisor, will be able to do a better job.

European Semester Officer

The Netherlands proposed an EU Super-Commissioner for Budgetary Discipline in 2011 that would control the budgets of the member states as a way of stabilizing the euro zone, and rules to expel members who didn't implement austerity swiftly and effectively in a downturn. Germany liked it, France and the UK hated it, and the idea went away. Or so it seemed.

This morning, the new head of the euro group, Dutch Finance Minister Jeroen Dijsselbloem, announced that the European Commission will install a so-called European Semester Officer in The Hague. The Semester Officer is intended to act as a watchdog over the national governments, without the status of a Commissioner. Legislation and treaty changes are not required. At the moment this post was written, news had not been reflected in the English speaking press. Jean-Luc Annaert, a Belgian, is said to be the first appointee.

Officially, the European Semester is part of an attempt to more strongly link economic policies in the fields of structural adjustment (competitiveness policy, known as Europe 2020) and euro zone commitments, for all member states) with tougher oversight and sanctioning mechanisms.

The Single Supervisor Mechanism is not a Banking Union

The EU member states have just reached a deal to grant the ECB oversight of roughly 200 EU banks. That is a small fraction of the roughly 6000 that would have been supervised under the original plan that the Commission proposed.

The most important features are still to be determined, but the ECB has stated clearly that it would require extensive powers to make the project work. For the goal, as far as the ECB is concerned was to establish some type of banking union that would mean forced mergers and takeovers, the power to take away ownership rights from shareholders (some of who are member states themselves), engage in other forms of strenuous intervention, and be responsible for all banks, getting beyond the myth that only large institutions can cause systemic failure.

The agreement in principle this morning is not yet a banking union. There will be further international negotiations that appear fated to water down the powers even further than they have been already, and the legal challenges have already been flagged.

Banking Union and the United Kingdom

If the BBC talks about leaving the EU over banking union, then you know you've hit a nerve. The key concern is that the euro zone will develop its own identity within Europe, and that will be bad for Britain's banks. What this says between the lines is that the prospect of a shift change in the tenor and content of banking regulation in the EU might be more than the City of London can stand.

It's conceivable that the English might vote to exit, deciding they have had enough, and are better suited to a partnership with the EU rather than membership. But if they do that, it's also conceivable that the Scots will vote to exit the UK to stick with the EU. The Prime Minister will have to think about that potential cost.

Banking Supervision is not a Banking Union

At 4 a.m. this morning, heads of government reached an agreement in principle to transfer supervision of banks to the ECB. The details of how far the ECB's powers will go, and how it will relate to the European Banking Authority to and national regulators is unclear at the moment.

This is a statement of intent rather than a substantive agreement, but a step in the right direction nevertheless. The distributional conflicts that have bogged down negotiations until now have not been swept aside. A banking union involves not only supervision of banking activities, but also measures to intervene in the affairs of the banks themselves. There is no agreement on this. More importantly, there is no budget.

The Germans are banking on the introduction of a financial transaction tax to fund cash injections, to avoid using existing tax revenue to fund bailouts. This has  a number of problems associated with it, however. The most important is that if the euro zone manages to introduce such a tax and the EU does not, it will incite euro zone companies and retail investors to move their assets offshore...to the UK or Switzerland, and deter new financial flows from entering. The investment strike will take its toll on the euro zone, if such a thing is not established at the EU level. Reuters reports that only 11 euro zone countries are currently in favour.

Defense, Offense, and the Euro Zone War

Nearly two years ago, I predicted that the main targets of the euro zone crisis would be big countries, not small ones. That has since turned out to be the case. But what does it mean for Greece? And what does it mean for the EU in an economic policy sense?

Briefly, the most important issue at stake is whether Greece will go bankrupt, and/or leave the euro zone. That is not a sure thing, but looking increasingly likely. There are limits on EU funds, and ECB purchases of Greek debt will come with intrusive audits and demands by the IMF. There will be no free lunch within the confines of the euro zone. It may prove unbearable for the Greeks to stay, or brush their pride the wrong way. The alternative of a short, sharp Argentinian crisis may be the alternative.

This means that unless the EU takes the offensive and builds a financial mechanism capable of fighting for large countries and small ones, that it must put a great deal of effort into defensive mechanisms that will help its members (both countries and banks) survive a Greek collapse, and then a Portuguese one, at the very least. Good boxers don't just learn how to hit. They learn to take punches as well.

A decade of austerity

UK Chancellor George Osborne thinks that government will have to continue austerity until 2018, a full decade after the financial crisis started. That's the optimistic view of finding the bottom of a downward spiral of deflation and budget cuts.