Scholz’s secret motive: why Germany needs full banking union
A boost for Europe’s feeble banks can only be a good thing in Berlin’s eyes
It feels churlish to question the motives of Olaf Scholz, the German finance minister whose constructive suggestions on a pan-eurozone bank deposit guarantee may break the deadlock on completing banking union.
That union — begun with the creation of the ECB’s all-in-one regulator, the single supervisory mechanism, and consolidated with a vehicle to wind up lenders in trouble, the Single Resolution Board — came unstuck four years ago when Germany blocked a single deposit guarantee. Mr Scholz’s predecessor, Wolfgang Schäuble, was adamant German citizens should not insure the deposits of banks in riskier parts of the eurozone, such as Greece.
Last week, in a Financial Times opinion piece, Mr Scholz wrote that “an enhanced banking union framework should include some form of common European deposit insurance mechanism”. As he himself rightly pointed out: “This is no small step for a German finance minister.”
He added plenty of caveats, and a broader context of reforms to other areas of bank balance sheets, for example the assumption that all sovereign debt is risk-free. The proposal elicited some sniping, notably from Italy, which is unsettled by the idea of any sovereign debt reform that would make it harder for its banks to be anchor buyers.
But broadly there were nods of approval. Olivier Guersent, the European Commission’s director-general for financial stability, said Mr Scholz’s intervention was “a bold move and very welcome”.
It is bold: the German finance minister is not only risking a backlash from ordinary Germans, already fed up with the perceived cost of bailing out southern Europe after the crisis of 2011. He is also endangering political stability: the most senior SPD representative in Germany’s grand coalition wrongfooted his CDU partners.
So why might Mr Scholz be so keen on such an idea? Simply advancing the European project may be one motive. There is also a prospective economic benefit: as Europe’s biggest economy, Germany should benefit from a more efficient eurozone, financed by banks that can operate more readily cross-border.
Bankers have long complained about the uneven status quo, with the deposit guarantees that underpin weaker banks in weaker countries distrusted by stronger rivals such as Germany. A pan-eurozone guarantee — and the completion of banking union — would unleash a keenness for banks to merge into diversified cross-border groups.
The stark truth is, however, that few banking systems are as weak as Germany’s. And its two big lenders — Deutsche Bank and Commerzbank — have had a truly dreadful run. Both have seen their stock price slump more than 90 per cent in a decade.
In recent weeks, Commerzbank slightly exceeded expectations on profitability, as it deepened cost cuts. But its return on equity was still a pitiful 3.5 per cent in the third quarter. Deutsche has been lossmaking for three of the past four quarters, as it attempts a radical investment bank restructuring. Neither has a convincing plan to generate anything like an acceptable return under its own steam.
Of course, most European banks are finding life tough at the moment. The ECB’s negative interest rate policy has cut lending margins to the bone, and economic growth is running at barely 1.5 per cent. European banks operating in global markets have been left behind by American rivals, which have grown through acquisition and thanks to a large, thriving and structurally more profitable domestic market.
EU policymakers may lack the power to invigorate economic growth but they are keen to help lenders merge or acquire each other. Bank bosses often argue that cross-border mergers within the eurozone are unattractive, or even undoable, as long as banking union is incomplete.
This, then, is where another motive — perhaps the most pressing one — for Mr Scholz, may come in. If Deutsche is to find a way out of its impasse, there probably needs to be some kind of combination with a rival. The same applies if the German government, which still owns a 15 per cent stake in Commerzbank after a 2008 bailout, is to sell out and help solidify the country’s number two listed lender.
Don’t expect Mr Scholz to admit as much. That would spoil Germany’s strongman image. But if banking union can be completed, and Europe’s feeble banks — particularly Germany’s — can be boosted, that can only be a good thing.