It is two years since French president Emmanuel Macron laid out his proposals for eurozone reform, including a eurozone budget and finance minister and completion of the banking union. For most of the time since then, German leaders including chancellor Angela Merkel have been politely resisting such proposals and especially any plans (such as common deposit insurance) that could put Germany on the hook if other countries and their banks get into trouble.
That is why a Financial Times article by German finance minister Olaf Scholz calling for European deposit insurance among a number of measures to complete European banking union has caused such a stir, particularly among Mr Scholz’s conservative coalition partners in the Christian Democratic Union. (Mr Scholz is from the Social Democratic Party.)
True, what he is proposing is a deposit reinsurance scheme as a back up to national schemes, but still it is a significant policy statement. In some ways, even more radical is the proposal for banks to hold capital against sovereign debt and one can see the arguments breaking out of the relative creditworthiness of eurozone sovereigns. Common insolvency and resolution rules for banks require ambitious changes to local laws and judicial process and common corporate tax rates for banks could have wider implications for the eurozone if it led to a harmonisation of tax rates more generally.
The timing of Mr Scholz’s article could be significant. France’s Christine Lagarde has just taken up the role of president of the European Central Bank and is expected to make the case that monetary activism without corresponding fiscal policy is a dead end. She has previously advocated the completion of the banking union, including a European deposit insurance.
From an economics standpoint all these reforms are a no-brainer and the only question is why the Eurozone architecture was so poorly designed in the first place. But now it seems as if the political climate is changing and that pushback from Germany may not be sustainable.
Brian Caplen is the editor of The Banker. Follow him on Twitter @BrianCaplen
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