A Reversal of European Banking Decisions Will Impact European Economic Recovery

Oct. 24, 2012
The decision by Germany against direct recapitalization of European banks will make the European recovery more painful and much slower.

You may remember that I have been encouraged about the prospects for the survival and eventual strengthening of the EU because of the creation of a European banking supervisor. The supervision would come under the auspices of the European Central Bank. The EU Commission approved the position and the concept of direct bank recapitalization in June 2012 over the objections of Chancellor Merkel of Germany. 

The Chancellor has decided to pull the plug on this all-important direct recapitalization by announcing that Germany would not be funding the program through the European Stability Mechanism. She denies that it has anything to do with Germany politics, but from the U.S., it certainly looks like it has everything to do with a re-election bid.

The decision by Germany may mean that no direct recapitalization can occur until 2016. This will make the EU recovery more painful and much slower. The move by Chancellor Merkel is unwise and not consistent with the views of the wider EU, a group that Germany says it supports. Sometimes we must all fall in line with the majority even if we do not like the majority decision. The only other recourse is bully-ism or eventual anarchy. 

Spain will be hurt by this and the most likely result is a capitulation to the ECB direct bailout program. The route is more expensive politically and financially, but Spain has few options left at this point.

President Hollande of France and Spanish Prime Minister Rajoy insist that the June decision holds and the bailout mechanism exists, despite Germany’s claims to the contrary. The only problem is that having a mechanism and having the money are two very different things.   

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