The political dynamics behind Europe’s new banking union

Abstract

This article examines the political dynamics behind Europe’s new banking union in two stages. First it examines the accretion of political power to two European institutions – the European Commission and the European Central Bank (ECB) – during the financial crisis, emphasising the ways in which the European Central Bank (especially under Mario Draghi) altered the relationship between principals and agents in the European institutional architecture. Second, it process-traces the policy conflicts and compromises that led to a Europeanisation and centralisation of bank supervision, recapitalisation, recovery and resolution in a remarkably short two years – a transfer in sovereignty to the supranational level equal to that involved in the creation of Economic and Monetary Union. The article argues, contrary to other analyses that stress the intergovernmental nature of the process and the bargains concluded, that the emergence of banking union reflected something of a neo-functionalist logic whereby supranational actors successfully interpreted the crisis as requiring supranational solutions, and shaped the outcomes in the face of sometimes fierce member state opposition.

Keywords:

• European banking union
• banking regulation and supervision
• European Central Bank
• European Commission
• EU-level agenda setting

Notes

1. There is a substantial debate about whether the banking union measures introduced to date are ‘enough’ to allow the Eurozone to cope with another large-scale financial crisis. We take no position on that issue but stress the politically and institutionally radical nature of the changes made since 2012 without speculating about their ‘effectiveness’ in a crisis. See Hellwig (2014) for the argument that the Eurozone’s banking union is sorely lacking and incomplete, and Véron (2015) for the opposite view that ‘healthy scepticism, misplaced cynicism and lazy inattention has prevented a general recognition of its true significance’ (Véron 2015: 8). For an argument that banking union is legally robust regardless of its hasty and contested construction, see Ferran (2014).

2. These changes all have implications for the functioning of Europe’s varieties of capitalism. We do not consider those here, but see Bronk and Jacoby (2013) for some thoughtful reflections on this issue.

3. Authors’ interview with a European Commission official, August 2013; cf. Scharpf 2013.

4. Authors’ interview with a European Commission official, August 2013.

5. Germany’s state-owned development bank Kreditanstalt für Wiederaufbau took over assets from its financing unit, KfW Ipex-Bank, after it was listed as one of the banks to be supervised by the ECB, reducing its balance sheet below the €30 billion threshold and putting it back under Bafin and Bundesbank supervision. In March 2015, Landeskreditbank Baden-Württemberg – with assets of around €70 billion ‒ filed a lawsuit with the European Court of Justice to challenge its direct supervision by the ECB (Henning and Stevens 2015).

6. In a series of articles, Wolfgang Münchau of the Financial Times has argued that banking union is necessary ‘to prevent doubts about the solvency of national governments from undermining confidence in their banks’. To the extent there is insufficient European funding for banking union, including, for example, for the Single Resolution Mechanism, then confidence will not be restored. Thus, Münchau concluded in March 2014, after the details of the proposed banking union were fully in place, that ‘a bad banking union is worse than none’ (Münchau 2014; see also Donnelly 2016).