Thomas Wieser on the EU’s efforts to stabilize the financial architecture

On 11 February 2014, Thomas Wieser, Chairman of the Euro Working Group at the European Commission, gave a lecture on “Europe’s Financial Architecture: Delivering on Stability”. The lecture was part of the SAFE Policy Center lecture series.

In his speech, Wieser emphasized that the current efforts to establish a banking union in Europe are necessary to bring forward the internal market also in financial services. He argued that one stark difference between markets for goods as compared to markets for financial services has become clear during the financial crisis: In the real economy, a failure of a goods-producing company leads to losses for banks and creditors. Financial crises, on the other hand, lead to a vicious cycle between bank debt and sovereign debt. Therefore, when a financial institution comes into trouble, then its failure costs the national tax-payer.

Following the financial crisis, most industrialized economies are now going through a debt crisis. In consequence, the awareness that we need burden-sharing to realize the internal market also for financial services, is growing. Wieser argued that Europe is now in the position to enhance its financial architecture and that the banking union framework will play a key role. In Wieser’s view, it will be important to recognize that the design of the financial architecture is an internal market issue and concerns all 28 member states of the European Union. For political reasons, some countries are portraying the banking union as having to do with monetary union. Wieser sees this as a danger, because it will weaken the cohesion in the European Union.

Among the elements of the banking union, the single supervisory mechanism will play a key role, Wieser argued, as it will lead to rapidly converging standards of supervision in Europe. The link between bank debt and sovereign debt will be further weakened by the bail-in of creditors now postulated in the Bank Recovery and Resolution Directive. And the Single Resolution Fund, which is going to be established over the coming ten years, will contribute to the financing of banking resolution and thereby serve as an effective backstop. Wieser was satisfied with the speed at which the European Union is moving to implement the financial framework and concluded: “we have several pillars and a pretty good roof; now we need the intelligence of the inhabitants to ensure the stability of the house.”

Wieser conceded that for a full banking union, shared fiscal sovereignty would be required, which is not in sight. But, according to Wieser, the current efforts will go a long way to strengthening financial stability in Europe. As such, the banking union is not a revolutionary but an evolutionary step. In Wieser’s assessment, the banking union is the best solution within reach, given the constitutional limitations, and it was expedient to move now.