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September 12, 2013 11:25 am

Blow to German banking union plan

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Germany’s pared down vision for Europe’s banking union has suffered a blow after the legal adviser to EU finance ministers largely rejected Berlin’s claim that creating a powerful central executioner to shut failing eurozone banks goes beyond the law.

A confidential paper from the Council legal service, obtained by the Financial Times, upholds the foundations of the European Commission’s resolution authority proposal, in spite of Angela Merkel of Germany saying such radical reforms require EU treaty change.

However the lawyers, in a paper dated September 11, concluded that as drafted the creation of a joint resolution fund potentially impinges on budgetary sovereignty, particularly while the pot is short of its €55bn target level. This finding will bolster those seeking a national veto on bank resolution decisions.

The German government argued that both the European Council’s legal service, and the advocate general of the European Court of Justice in a separate ruling, had actually confirmed Berlin’s main legal objection to the European Commission’s proposal for a common bank resolution fund for the eurozone.

The diplomatic tussle over a single bank resolution system – the next leg of European banking union – is billed as the most politically charged in Brussels this year, pitting the euro area’s heavyweights in a battle over power and money.

While the legal service’s opinion is non-binding, its views can be decisive in debates and the opinion will be a setback for Berlin, which has primarily attacked Brussels’ blueprint to centralise sweeping powers on legal grounds.

Finance ministers will gather in Vilnius on Friday for informal talks on banking union, aware that lawyers from all the main EU institutions – the commission, the Council and the European Central Bank – disagree with Berlin’s main legal objections.

Lithuania, which holds EU’s rotating presidency, suggested the legal debate was almost settled. “We believe the Council Legal Service opinion will be sufficient in order to address the member states’ concerns,” said Rimantas Šadžius, Lithuanian finance minister, in a letter to counterparts. “With this in mind, I would invite you to focus on other substantive issues in the proposal and not necessarily the legal aspects.”

FT Series

European banking union

The EU’s banking union plans seek to place eurozone banks under the overarching supervision of the ECB

The Council legal opinion addresses three German concerns: that a single market treaty base is unsound for a powerful resolution authority, unsuitable for imposing levies on banks to build a central fund, and inappropriate given the resolution system does not apply to all EU member states.

The lawyers conclude that the commission plan “may be a suitable legal basis” as long the resolution system “responds to a genuine need of uniform application of the rules on resolution that could not be achieved through other methods of harmonisation”. Even under single market law, the lawyers see no need for the regime to cover all EU banks, given those under ECB supervision are clearly distinguished.

The German finance ministry pointed to the opinion of the advocate general, in his opinion on the regulation of naked short selling, had determined that Article 114 of the EU treaty could only be used for internal market harmonisation measures, and not for the replacement of national laws with EU legislation.

Arguments over the resolution fund are less clear cut. Council lawyers found that a single market legal base may be suitable to establish a resolution fund, provided it is deemed to be indispensable for the resolution system and “an adequate mechanism to safeguard the budgetary sovereignty of member states is introduced”.

Here the lawyers find fault with the existing Commission plan, saying it “does not contain a robust system to guarantee” budget sovereignty, “notably throughout the [10 year] transitional during which the target funding level has to be achieved”.

Berlin seized on that point, arguing that such protection for national budgets was “essential”.

Some safeguards included by the commission were also found insufficient as majority voting rules “do not ensure the effective capacity of a member state to avoid the adoption . . . of decisions encroaching on its budgetary powers”.

This caveat will be important for Berlin and other states pressing for a big national say on decision to wind-up lenders. The potential for the commission, as the top resolution authority, to shut a bank against the wishes of its home country is a fundamental tenet of the reforms.

Additional reporting by Quentin Peel in Berlin

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