TOO LITTLE RESULTS AND FAR TOO MUCH COMPLEXITY, AFTER TWO YEARS OF NEGOTIATIONS The banking union, another European project without a future?

After negotiations which have lasted once again all night, the European authorities have announced, in the middle of last week, the completion of a new stage in the process towards the creation of the banking union. This new European structure is intended to break the vicious connection between banks and governments, which has fully demonstrated its negative effects over the last few years.

In order to guarantee the success of the banking union, the authorities still need to go through, but the European authorities still need to go through the stage of the shared framework for guaranteeing deposits.

When initiating the approaches for the creation of the banking union, the European authorities agreed that the new integration framework would be based on three pillars: the European Central Bank, as a sole supervision authority, the Single Resolution Mechanism together with a common fund for the bail-out or the orderly closure of distressed banks, and the common framework for the guarantee of deposits.

What has been achieved on the first meeting? Merely the smoothing over of some divergences tied to the financing of the resolution fund and the weakening of the power of national governments in the process for the liquidation of distressed banks. It would seem that the problem of the common fund for the guarantee of deposits has not even been placed into question.

Thus, the creation of the fund of 55 billion Euros must be done in eight years, compared to the initial deadline of 10 years, but the ECB wasn't fully pleased with this option, as it wanted an even shorter deadline. Also sped up was the polling of the amounts which the banks will contribute to the creation of the resolution fund, with the goal being to collect 60% of the total 55 billion at the end of the first two years.

The responsibility for setting the contribution of banks will still lie with the finance ministers from the countries belonging to the banking union, and here lies a problem. As I wrote in a previous article (author's note: "Will the banking union lead to a forced consolidation of the banking market in Europe?", BURSA, 10.03.2014), the initial requirements have been watered down, in order to favor the major banks, as the individual amounts were supposed to be set according to size of the balance sheets and the risk degree of the financial institutions.

Financial Times later wrote about the complaints of France and Spain, which want the algorithm to be changed, with the final goal obviously being to have the contributions of French and Spanish banks to the resolution fund be reduced.

The new framework also stipulates that the new banks may be shut down despite the opposition of their governing countries, with the European Commission to play an important part in that regard. What remains to be solved is the effective is to establish the effective procedure for the orderly closure of a financial institution, as Financial Times wrote that more than 100 votes in various commissions are needed (author's note: it was also FT that tallied, prior to the latest meeting of the European Authorities, the number of votes, which it placed at 126).

Nevertheless, the ECB was quick to express its satisfaction for the agreement between the European authorities concerning the second pillar of the banking union, as the press release states that "the negotiations between the European Parliament and the European Council have led to the creation of a more efficient Single Resolution Mechanism".

Perhaps the exuberance of the European Central Bank should be a little more subdued, especially since officials of the bank warned that "the failure of the SRM is very close to a suicide". Mario Draghi also said that "the agreement represents a major progress towards a better banking union", because "two of the pillars have been accomplished".

But is it enough? Dirk Schoenmaker, a professor at Duisenberg School of Finance from Holland, wrote, ever since the apparition of the banking union project, that the gradual approach, where the unified guarantee of bank deposits doesn't have a clear deadline for its implementation, "can lead to an unstable banking union".

Aside from the unrealistic hypothesis of the cooperation between the European and the national authorities, which is absolutely necessary for the operation of the banking union, the success of the project eventually depends on the funding available for the resolution of the bank defaults.

The opinions of the ECB, as well as those of the economists in banks, show that 55 billion are insufficient. In theory, the fund can be supplemented through loans, but at what cost, considering that there won't be a common guarantee of the governments in the Eurozone? "The 18 countries in the Eurozone will not jointly participate in bearing the costs generated by bank defaults, which is a fundamental aspect of the original plan of the banking union", according to an article written by Reuters. The news agency also reminded that "Germany has stood its ground when it comes to the pressure coming from Spain and France" in that regard.

Mark Wall, chief-economist for the Eurozone at Deutsche Bank, considers that the banking fund of the SRM is insufficient even if the bail-in procedure were to be applied to the creditors of banks, according to a statement given to Reuters. To Carsten Brzeski, economist at ING, the size of the banking fund is irrelevant, because its use is stipulated in a remote future, like Reuters further writes, whereas "the process for liquidating a bank is far too complicated and lengthy".

The unforgiving verdict however, comes from professor Paul De Grauwe from the London School of Economics, a supporter of a far stronger European integration framework, the fiscal union.

"The key element for the banking union is the existence of an authority with a financial power. Which doesn't exist, therefore we do not have a banking union", De Grauwe told Reuters. "The whole point (author's note: of the banking union) was to break the deadly union between banks and governments. But if a banking crisis were to erupt again, we will go back to the situation of 2008, when every country was on its own", the Belgian professor said.

The complexity of the framework of the banking union, is not however, the main factor that puts in doubt the ability of the new structure to resolve the future banking crises. Unfortunately, the European authorities are disregarding the main cause of the current situation: the nature of the monetary and credit system requires the never-ending expansion of debt, because there is no other way to repay the interest and the principal from the previous trades.

Under these circumstances, the bail-in, both that of investors as well as those of depositors, remains the only certainty in the project of the banking union. Any other measures will come just they used to until now: through never-ending negotiations late into the night, under the pressure of events that show no hint of being willing to obey the unrealistic plans of the European authorities.