© Catharina Schorcht

Bundesbank President Jens Weidmann has come out against the creation of a single deposit guarantee scheme in the euro area in the near future. This is a key aspect in which he distanced himself from the European Commission's Five Presidents' Report on the future of monetary union. In this report, presented by Jean-Claude Juncker, the heads of major European institutions, including Donald Tusk, Jeroen Dijsselbloem, Mario Draghi and Martin Schulz, called for an agreement to be reached by 2017 on a single deposit guarantee scheme.

In a speech before the industry confederation for the district of Gütersloh, Weidmann said that, now that the SSM is in existence, it would be logical in a way, at least for the institutions supervised directly by the European Central Bank; to belong to a single deposit guarantee scheme. "However, the fortunes of banks do not hinge solely on supervision, but are still heavily influenced by national economic policy and national legislation, too," he noted. "This is why I regard cross-border risk-sharing in respect of deposit protection as premature."

Weidmann pointed to national insolvency codes as an example of national influence on the banking sector; under such legislation, more forgiving rules on the insolvency of corporates or private individuals could impair the profitability of banks and shift burdens from the private or public sector onto banks' balance sheets. Weidmann illustrated the risk of a single deposit guarantee scheme by noting that "if this drives banks into distress, depositors from other European countries would then effectively have to foot the bill." He also believes it would be too early to create the single unemployment insurance fund that some have been calling for. To him, it will remain that way as long as the member states themselves control the main job creation levers, including the implementation of labour market reform or investment in education.

Long-term transfers in one direction

Weidmann acknowledged that a single unemployment insurance fund or other fiscal stabilisers could cushion country-specific shocks but pointed to the danger that such payments could morph into long-term transfers in one direction. "Regular transfer payments, without setting up a genuine fiscal union, would be like tilting the angle of a crooked picture even more," he observed, adding that liability and control would, to maintain the metaphor, go even further off-kilter. Through joint liability, the risks would be spread over the shoulders of all euro-area countries, whereas control rights would remain with sovereign states. In order to right the picture, effective control and sovereignty rights would need to be transferred to the European level. The Bundesbank President sees euro-area countries having difficulty with this, however. In this connection, he criticised the Five Presidents' Report for putting forward proposals which "aim clearly for centralisation and risk-sharing" but failed to broach the topic of joint control rights. However, a true fiscal union or even a political union, in his eyes, is predicated on surrendering sovereignty. This would not only necessitate amendments to the European Treaties, but in many cases, to national constitutions as well.

Strengthening the Maastricht framework is the way to go

According to Weidmann, absent the political will to embrace such measures, strengthening the Maastricht framework is the way to go in order to restore stability in the monetary union. He said that the liability principle needed to be strengthened, and that several institutional reforms going in that direction had already been implemented. Weidmann listed as examples the creation of the banking union, stricter financial market regulation and changes to the rules of the Stability and Growth Pact. However, the Bundesbank President criticised the debt rules for allowing scope for interpretation and discretion which was being used to kick the can of fiscal consolidation further and further down the road. The European Commission, too, in its dual role as a political institution and as the guardian of the Treaties, was leaning towards making compromises detrimental to fiscal discipline. "Strengthening the Maastricht framework would also relieve the strain on Eurosystem central banks, which all too often had to take on the role of ‘sweeper' during the crisis," he added.

Stricter fiscal rules not enough on their own

Yet a stricter interpretation of the fiscal regulations alone, according to Weidmann, would still not be sufficient to safeguard sound public finances. "We must also strengthen the disciplining function of the financial markets," he said, noting that there needed to be a real possibility of the euro-area countries allowing a sovereign to default. In his words: "The ‘no bail-out clause' simply lacks credibility." That principle could only be credible if there were an orderly procedure for winding up a sovereign without this having a knock-on effect on financial stability. To that end, the preferential regulatory treatment of government bonds needed to be abolished, said Weidmann. "The Greek drama has shown beyond a doubt that government bonds are far from risk-free." He also called for the adoption of rules at the global and European levels to increase banks' liable capital, adding that the more equity and liable (ie bail-in-able) debt capital banks had, the better equipped they would be to withstand sovereign debt restructuring.