April 18. 2024. 1:27

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Make banks safe again

While the recent failures of banks in the US and in Switzerland might give a new impetus towards a reform of the European bank crisis management and deposit insurance (CMDI) rules, opposition is likely to be strong, especially from Germany.

Originally, the European Commission had planned to present a CMDI package reviewing the bank recovery and resolution directive, the deposit guarantee schemes directive and the single resolution mechanism regulation in early March this year.

But at some point in February, the CMDI package was suddenly, and without explanation, gone from the agenda for the first half-year of 2023. A review that is proposed any later than that, however, is certain not to be finished before the 2024 European elections and thus doomed to be delayed for a long time.

Back on the agenda

As if to punish the Commission for its apparent inertia, the finance gods sent shivers through the financial markets via overpaid and underperforming bank managers in the form of the collapse of the Silicon Valley Bank and Credit Suisse.

And it looks like the signs have been seen. The CMDI package has popped up again in the Commission agenda: On 18 April, the EU executive plans to propose its package reviewing the aforementioned directives.

While European leaders insisted that European banks were safe in order to calm the signs of panic in the air, a reform is necessary.

“Our own crisis framework is not ready,” Karel Lannoo, CEO of the European policy thinktank CEPS, told EURACTIV, arguing that what happened to Silicon Valley Bank and Credit Suisse could happen in the EU as well.

Difficult resolution

According to Lannoo, there are two main problems in the current system.

First, the bank recovery and resolution directive contains loopholes that allow member states to refrain from a European resolution and solve a bank crisis nationally instead, for example by selling it to another national player at an advantageous price.

Christian Stiefmüller, senior research and advocacy advisor at the finance NGO Finance Watch, told EURACTIV that “the EU should concentrate, first and foremost, on closing the gaps in its own recovery and resolution framework”.

The Credit Suisse case has shown how difficult it is to apply a crisis framework in practice. While there was a detailed law on bank resolution, politicians decided to throw it out the window and use emergency law instead.

“Such decisions are made over the weekend under a lot of pressure,” Lannoo explained the difficulty of following the letter of the law when financial markets are threatening to collapse and take entire economies down with them.

European deposit insurance

Second, there is the problem of national deposit insurance systems that are unequally safe.

Currently, German banks have an additional layer of protection through an institutional protection scheme that insures deposits above the European standard of €100,000 in deposits.

According to Lannoo, this creates imbalances as only strong banking systems can afford to introduce such additional protection.

“We should move towards a Europen Deposit Insurance Scheme (EDIS),” he told EURACTIV. This could be done in a gradual way, for example by creating a European re-insurance of national deposit insurance schemes, he argued.

German politicians are divided on the subject. In an op-ed for EURACTIV, Green MEP Rasmus Andresen said that “now is the time for European deposit insurance”. Meanwhile, also in an op-ed for EURACTIV, centre-right MEP Markus Ferber warned not to exaggerate and not to endanger the functioning of a reliable system.

On 18 April we should know more, if the file does not suddenly hop off the Commission agenda again.

In the euro area, corporate profits have risen substantially over the past year, according to data from the European Central Bank (ECB). This week’s chart shows the annual growth rate of the gross operating surplus of non-financial corporations in the euroarea.

The gross operating surplus measures the turnover of euro area companies minus the cost of intermediate goods and services and minus the compensation that is paid out to employees. More generally, it measures how much is earned by the capital factor in the economy.

And capital earned well last year. After a volatile development in the pandemic years of 2020 and 2021, growth rates have remained at a very high level in 2022, significantly above the pre-pandemic years of 2018 and 2019.

This data helps understanding where the inflation in the euro area is coming from. Despite the rise in energy prices and labour shortages, companies have made significantly more money in 2022 than before.

They were able to increase prices by more than was necessary to offset the increase in prices of intermediate products (e.g. energy) and labour.

According to a Reuters report, the ECB has recently begun acknowledging this problem internally. However, this problem is not just for the ECB to resolve. The data also makes a case for sticter competition enforcement, or, in some cases, for price control measures.

Swedish presidency deprioritises work on Forced Labour Product Ban. As diplomats from three different EU member states confirmed to EURACTIV, the Swedish Presidency of the EU Council is deprioritising the work on the Forced Labour Product Ban in the working party responsible for coming up with the negotiation position of the member states. “At the moment, yes, Forced Labour is a bit on hold,” one diplomat said, arguing that there were many other files that had to be treated with priority. This will make it harder for co-legislators to come to an agreement on the file ahead of the European elections in 2024.

Climate experts, academics call for stronger EU climate due diligence. The EU corporate sustainability due diligence directive, currently debated in the Parliament’s legal affairs committee, should better align with the Paris goals and hold EU companies accountable for environmental harm, according to climate experts and academics. In a statement, the signatories said the draft directive has “weak expectations for companies” when it comes to transition plans and climate obligations. They proposed to introduce stricter requirements to monitor companies’ plans and allow those affected to take companies to court if they fail to deliver on their climate targets.

Setback for Single Market Emergency Instrument. A legal opinion by the EU Council Legal Service (CLS), seen by EURACTIV, considers important parts of the European Commission’s proposal for the Single Market Emergency Instrument (SMEI) to contradict EU law. Especially the SMEI’s provisions for national strategic reserves, the information requests to economic operators and priority-rated orders should be deleted or significantly amended, according to the CLS. Read more.

EU Commission to present an “Economic Security Strategy” by June. In a further step towards a more resilient and geopolitical EU, the EU Commission will present an economic security strategy ahead of the summit meeting of EU leaders at the end of June. While details are unclear for now, the strategy is expected to touch on outbound investment controls as well as on export controls for goods that might be used for military purposes.

Chambers of commerce sound the alarm over foreign subsidy regulation. On Tuesday (4 April), chambers of commerce from the US, Japan, Korea, India, Switzerland and other business associations criticised the implementing regulation the EU Commission proposed to implement the foreig subsidies distorting the internal market regulation. For example, they want the Commission to narrow the scope of the reporting obligations, exempt information that third-countries regard as classified. Under the foreign subsidies regulation, companies will have to start notifying subsidies they receive in third countries in October 2023.

Euro area inflation decreases, but core inflation on the rise. Driven by a fall of energy prices, annual inflation has decreased to 6.9% in March, according to an estimate from Eurostat. However, if you exclude energy, food, alcohol and tobacco from the basket of goods, annual inflation is still increasing.

Germany proposes giving more teeth to competition authority. The German government proposed a draft law on Wednesday (5 April) to give its competition authority more powers to tackle interferences with competition, following allegations that petrol stations had artificially kept fuel prices high in 2022. Read more.

French PM won’t back down on pension reform despite union objection. The government will not change the widely opposed pension reform text adopted without a vote and led to mass protests around the country, unions confirmed after Prime Minister Elisabeth Borne met with them for the first time since January. Read more.

UK to introduce new customs rules on EU goods from November. After more than two years of post-Brexit delays, the UK has promised to introduce a light-touch set of customs rules on goods from the EU later this year. Read more.

Belgium’s supermarket prices increase by 20%. Prices in supermarkets have increased by around 19.3% over the last three months compared to the previous year, with inflation exceeding 20% for the first time in March, a study by the consumers association Testachats revealed on Tuesday. Read more.

Who said or what said? Estimating ideological bias in views among economists. In this paper, Mohsen Javdani and Ha-Joon Chang examine the ideological bias of economists. They find that many economists change their evaluation of a statement significantly depending on whether the statement is from a mainstream source or a non-mainstream source.

Why Europe’s critical raw materials strategy has to be international. Bruegel’s Marie Le Mouel and Niclas Poitiers analyse the EU’s dependence on critical raw materials in response to the EU Commission’s recent proposal for a Critical Raw Materials Act. The analysis includes a helpful breakdown of where the EU gets its critical raw materials from.

A five-point plan for EU Industrial Policy. As the EU takes ever further steps into the relatively unknown territory of EU industrial policy, Jakob Hafele and Jonathan Barth from the ZOE Institute propose a plan that should allow the EU to have a successful transition while minimising the threat of private capture of public resources.