Philippe Legrain on the so-called “banking union”

Calling something a banking union does not make it so; Philippe Legrain joins the ranks of people like Colm McCarthy and Wolfgang Münchau pointing out that this is an emperor without clothes.

33 replies on “Philippe Legrain on the so-called “banking union””

“More likely, the ECB will fudge the exercise, owing to fear of reigniting the financial crisis and pressure from national governments. Small countries will be singled out to make the exercise look tough, while bigger problems will be swept under the carpet: German banks have already succeeded in excluding many of their assets from the assessment.”

Morgan Kelly is not the only person that believes the ECB will be looking for a sacrificial lamb, one that does not bleat too much.

Nothing will happen until Germany is sure that its Landesbanken and others are OK and that the The Derivatives Death Star hovering over Frankfurt and DeutscheBanke somehow moves on …

The recent “agreeement” – with MINIMALIST funding – was, quite simply, pathetic. The Big Banks and the Vulture Funds were EUphoric!


some folks are obviously disappointed that the banking union ruse could not be turned into a criminal attack on the founding treaties and its principles,

no bail out, no money printing

My own thoughts on the banking union were in last Thursday’s Irish Independent.

In Banks don’t work the way you think – but they should I describe the fundamental problem right at the foundations of the economy. i.e The haphazard creation & destruction of money by banks.

Highlights include:

“While the EU toils over legislation aimed at improving the safety nets around banks, it’s worth asking why banks are such inherently dangerous institutions in the first place.”

“Banks have been creating and destroying money for a long time. We’ve legalised and regulated the practice for over 300 years and during that time we’ve tried many things to maintain stability, with very limited success.”

“We’ve tried correlating money with restricted commodities such as gold. We’ve tried the same links for international trade only. We’ve tried keeping bank-created money in check by correlating it with central-bank-created cash. We’ve tried strict limits on how much banks can create and then gradually removed almost all parameters through the deregulation in the 1980s.”

“We’ve tried prohibiting banks from creating money for projects that don’t involve an increase in GDP. We’ve tried public and private insurance on bank ‘deposits’. We’ve tried entrusting central banks, financial regulators and financial services authorities with monitoring stability and have put various tools at their disposal.”

“Other attempts include adjusting and abolishing minimum reserves to be held at the central bank, minimum liquidity ratios, liquidity coverage ratios, capital adequacy ratios and now risk-weighted capital adequacy ratios.”

“We’ve tried encouraging businesses to take on more debt, then governments and then households, until all three have approached their limits. We’ve tried adjusting the money stock through tweaking interest rates and adding ‘whatever it takes’ to the central banks’ box of economic tricks. After all this time and all these attempts, here we are with the ultimate money mess. It seems unlikely that the latest plan, a eurozone banking union, was the key to stability all along.”

@ francis

Actually, I do not think that that is entirely the point!

The political deal that has been struck on banking union is a case of what the French would describe as “donnant, donnant” or, in English, “give and take”. The governments that are creditworthy and can stand behind their banks – no matter how bad the latter are – can hardly be expected to stand behind those governments that are not if their countries are unwilling to take the steps that would improve their creditworthiness i.e. progress on a more integrated banking union is linked with progress on creditworthiness (also known as “structural reform”).

This is more than obvious from the various timelines established.

That’s it! The rest is squabbling about procedures that will melt into insignificance in the face of the political reality of the choices that have to be made if and when another systematically relevant bank or banks is faced with collapse.

Given the recent political developments in France, which are approaching a Gallic farce, and the last-minute hiccups on the banking union legislative front, the situation is not looking too promising.

Ah yes there it is again: “structural reform.” Is there any question to which it is not the answer?

Francis, Ireland printed around 30bn years ago and ECB QE of some sort is quite likely over the next year or so.


In the context of a so-called European Union your so-called logic is fatally flawed. You continuously peddle the self-centered Germanic argument that governments at a lower system level are solely responsible for ‘their’ (sic) banks while conveniently ignoring the fact that capital flows from the (also) flawed higher system level Euro are the real source of the imbalances.

Have you considered going back to Schule and taking System Science 101 in parallel with a module on Gobbelsian Propanganda and its ‘useless, if dangerous, idiots’. A mirror should also prove useful … but methinks you are blind to certain realities.

The text of the relevant Regulation in its almost, almost final form has now been released on the Public Register of the Council. It is heavy going. It may also be noted that the inter-governmental agreement on the funding of the SRM has still to emerge and that the EP wishes to ensure that it does.

@Ernie Ball

Ah yes there it is again: “structural reform.” Is there any question to which it is not the answer?

The words “Structural reforms” as they apply to national states can usefully be replaced with “Conservative fantasies”. Try it and see, its fun.

Or just read Aidan Regan again:

So what is the core economic idea that they share? It is the magic economy dust formula of ‘structural reforms’. It is the idea that if national governments just sprinkle enough structural reforms into the economy to enhance market competition they will, eventually, generate the conditions for employment growth……But the point to be noted is that the empirical non-falsifiability of structural reform policies is the idea that underpins the consensus between the national and supranational levels. It enables all of the actors to sell a policy that no one understands or can even refute. It is a fairytale.

The most awful thing about the the European component of the global financial crisis is how its been used to utterly subvert representative democracy by the extreme right – we now have a neoliberal policy agenda embedded in national law and enforced through ECB dictat and German obstructionism. The financial sector and EMU caused the crisis but it is social democracy that has been the relentless target of the EU/German bloc.

It is telling that DOCM is the only defender of the European Union’s policies here (a lonely position), even if he/she/the department are very voluble. If no one supports the current policy agenda (apart from EU apparatchiks) then why is it being implemented everywhere? Why despite five years of policy failure in the EU has nothing changed?

Is that being a citizen in the EU now entails living in a managed democracy (a la Singapore) where the public gets what the political elite wants? If so how can that can be peacefully changed?

For people who may not know or didn’t have time to look at the article the thing that struck me was the description of the author:

“Philippe Legrain, an economic adviser to the President of the European Commission until February 2014, is the author of European Spring: Why Our Economies and Politics are in a Mess – and How to Put Them Right.”

So even the most insider of insiders, the moment they get out, ring the alarm bell.

Some more clearing of the banking decks in Germany.

The fact that much of the shipping finance was on the basis of attracting individual investor groups for individual ship construction may be noted (cf embedded link). A floating German version of Ireland’s Section 23!

On the other side of the equation, Greece has today had no difficulty in raising funds on the market and at a relatively low rate below 5%.

Gavyn Davies had a fascinating blog comment on the continuously falling real interest rates over the past three decades.

@ GK

Can you list any significant contribution by Barroso to anything over two periods in office as President of the Commission?

@Gavin Kostick

So even the most insider of insiders, the moment they get out, ring the alarm bell.

It’s an interesting thing, isn’t it? Almost no one publicly supports the economic policies of the EU unless they have a current financial interest in doing so.

I think there might be a word for that.

On a totally unrelated note Olli Rehn has an annual salary of around 240000 euro while Manuel Barosso is paid closer to 300000 euro per year, both sums untaxed by default, both posts have additional expenses paid for.

A five year term as a senior official in the EU could make you a millionaire and then some, even if you preside over an economic and human disaster on the scale of the European component of the global financial crisis.

@ jg

Greece has always been “special” because of her geo-strategic situation, at least as perceived by the EU and the US at the time of the country’s entry (1981) to the EU, which was premature, to say the least. The market’s view of the country’s situation today is almost certainly correct, especially given political developments in Turkey, nominally a partner with Greece within NATO but with Greece justifying extraordinary levels of military expenditure – which the main weapons suppliers of EU (Germany, France and the UK) were happy to enjoy – because of a perceived military threat from said partner. That is to say, the West will not drop Greece in it under any imaginable circumstances especially given the antics of Putin with regard to the Ukraine.

To recall a sweater slogan on a windy wet Irish beach at the height of the crisis, “Ireland is not Greece”. And is unlikely to be confused with Greece except those commentators with a shaky grasp of both European history and geography (of which there is an ample supply).

The FT has it about right.

@DOCM bombs going off,20,000 protestors on the streets,political scandals but other than that im sure Merkel will be warmly welcomed.
But its good they back in the markets:)

“Danske Bank’s dealer Owen Callan has predicted that a successful sale will help other eurozone countries, telling Reuters:

“Yields in Portugal, Italy, Spain and Ireland are no longer just compared to what is below them, but also now to what is above them. As Greek yields fall, that should help provide further momentum in these markets.”

@ jg

Unless Richard Curran is right in posing his other question; has the overall market gone bonkers? I am no expert in this area but the obvious conclusion of too much money chasing too few “safe” assets seems to suggest itself.

The BOE has been forced to swallow its last minute misgivings with regard to the fine print of the banking Regulation.

The way is now clear for the entry into force of the legislation when the EP votes it through at first reading next week.

That the measure is in the form of a Regulation that “shall be binding in its entirety and directly applicable in all Member States” (Article 88.4) is a measure of how far all countries of the EU – and the UK in particular – have come in acting collectively to restore to health the European banking sector.

@ jg

Not having any expertise in the area of bond investment, I can only arrive at a view on the basis of sources that seem credible. Among these I would list Gavyn Davies. He seems to me to have drawn attention to a real curiosity; the decline of real interest rates over 30 years. Herewith the link again for ease of reference.

A persuasive explanation of why this should be so, indeed any real interest, seems lacking among the serried ranks of economists, both academic and business. But there must be some link with the equally curious gyrations in markets that are taking place. (An experienced person of my acquaintance volunteered the view to me years ago that a day dealing in the markets, whether equity or bond, was equivalent to a day at the races. I was never a betting man!).

John Authers has now also turned his attention to the questions posed.

To put things into a little more historic perspective:

go to the last graph, US interest rates since 1790

Japanese rates since 1972:

There was a nice Goldman Sachs paper on FX Fair value, between US, DE, JP, but that is all now behind pay wall

To understand, what has happened in Japan after 1990, you have to look back at least to the end of Bretton Woods 1974

yahoo has data for the Nikkei ^N225 only back to 1984, but look at the development. in 1990 they were at 40 000, and thought they are invincible. Now they are at 13 000, and how this Abenomics experiment turns out, is a very interesting question.

That was the mother of all asset price bubbles, stocks, real estate, etc.

The household debt of 120% disposable was used by some Warren Brussee to predict “The second great depresssion, 2007 – 2020”

When these long term mood swings / Kondratieff cycles, whatever you call it, have a period of about 40 years, looking at 10 – 30 years data is of very limited value.

@ JG/francis

Which brings us neatly back to the proposal by a group of economists, including Philip Lane, for ESBies.

Unfortunately, Europe’s governments have neither the political cohesion nor the guts to adopt it. Instead, one gets two hesitant steps forward and one step back.


misunderstanding on my side, since I was hanging into my own thoughts, how to provide more useful information with respect to Japan, without delivering a full deluge : – )

From my perspective the ESBs became history just 3 weeks later, when the ruthless behavior of Greek Papandreou and Italian Berlusconi became obvious and let to their ouster.

Irish 10-year rates are now below 3%, have they ever been soo low? The ESM takes care of speculator attacks, and the OMT of potential currency wars. Problem solved. And is clear, that if some country tries some shenanigans, they go down alone, enforcing proper, legal behavior.

Back to Japan:
For reference, completeness, German rates during that time:

Japan was in 1985 at a seemingly endless boom, from some cheap second tier manufacturer to a gung ho first class high tech empire.

That a lot of this was driven by a significant undervaluation of the yen, ending after plaza / louvre agreements, and artificially low interest rates at home (1983 – 1990) was not seen by most.

But to add some real world impression from this time, since most of you are probably not old enough, and not in semiconductors. To give you a flavor of this time, this was like the Irish real estate delusions in 2006 on stereoids.

People talked and acted about national emergency technology programs (Mega Project) and as the alternative to run around in Seppelhosen for Japanese tourists a few years later : – )

At that time they seemed to be invincible, philips dropped out of first league, AEG was liquidated, Siemens was just hanging in. From 3 first tier litho tool suppliers the first 2 were Japanese (Canon, Nikon) , the 3rd, ASML hanging by the thread, with customer credits.

Japan was building car plants in the US beating up the Detroit 3 left and right.

And when you read something like Hans Queisser “Kristallene Krisen” 1987, that was not just some asset price bubble but in parallel to some gigantic real world factory invest.

And this gigantic price bubble 1985 – 1990, brutal extension of credit everywhere, is TYPICAL for this nend of a long boom, not the exception. Nothing new, south sea bubble, tulip mania predating the industrial revolution.

@ John

it reminds me also of a sign on a traffic signal somewhere in California:

“please God, just one more bubble”

I forgot to mention, that the gigantic loans the Japanese corporations took, were also “guaranteed” by cross holdings and real estate, the latter apparently similar to Ireland.

I tried to find old reference, at least not quickly.

Sometimes I think I would like to have had that euphoria feeling like Ireland 2006 once in my life. Maybe we had a little bit like that in Summer 1990, with reunification and football world cup. But the East German mess became clear very quickly, xmas 1990 the latest.

@Pair of Gurriers + DOCM

Keeping up a longstanding tradition on this blog: Would the troika like a room? Free wiFi included – U can have your own blog. The Derivatives Death Star Hotel in Frankfurt has great value at the mo.


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