May 01, 2018
What Germany wants to reform, and what not
The FT has a story from the last weekend's informal Ecofin meeting in Sofia, in which Olaf Scholz appeared to have signalled readiness to compromise on a fiscal backstop for the single resolution fund, but not on deposit insurance. We are not entirely sure from the story what concrete action Germany supports. Scholz seems to be clearer on what he does not support. He definitely ruled out any discussion on deposit insurance before the June deadline, calling it a long-term goal. For June, he prefers a narrower agenda.
Scholz told ministers that the strengthening of the banking union constituted a priority, which can only mean that he is ready to discuss the fiscal backstop idea. What the story has not addressed is how it is possible for a bailout fund to act as a fiscal backstop to the banking system if each programme is subject to a vote by the Bundestag and several other parliaments - as is currently the case, and as it is mandated by the German constitutional court. The ESM's current governance system is simply not compatible with a credible backstop function. We fear that there is giant fudge in the making: a press release to say that the EU now has a banking backstop when in fact it doesn't.
The article makes a reference to the fact that officials expect the small print in any backstop compromise to be a politically sensitive issue. Some governments were concerned that Germany will try to attach conditions to the release of any money. We agree. This will be Germany's negotiating strategy.