After very long negotiations, there have been some indications that the financial problems in Greece could be over soon. This came as the countries from all over Europe made a deal in what could be termed as one of the most discussed financial debates (Fairless). Finance ministers from all over Europe came together in Greece capital to discuss how they thought would be the most appropriate action to rescue any country before it goes into crisis like Greece did. They agreed that European Union Central bank would be used to regulate the economy; the bank will decide when to fund a collapsing bank all over Europe or even close the bank. This would have been the case with the collapsed Greece economy. The EU Central Bank is expected to act as a supervisor, a role it will take on mid-2014.
Though it is a rather complicated issue, it is a pool of strength by various economies across Europe. The main idea behind this plan is to bail out unviable banks using government funds rather than using the tax payers’ money. This came mainly after the collapse of Central Bank of Greece. This will help the countries to avoid oversized financial centers, however, for the European Union to intervene to save a collapsing bank, few conditions must be met; one of the conditions is that the national government of the host country must have a financial ratio of 4.5%. The national government must also be willing to participate but with only 20%. This was the case with Greece; the central bank collapsed leaving the economy at a swinging position.
It is clear that this plan aims to save the banks while bailing out the national government so as to avoid exploitation of the system. Although this might seem pretty easy, some countries who were opposed to the handing over the control of their banks might be uncomfortable giving European Union full control over their banks.
However, the main concern about the whole process is that it would lack enough funds (Shiller). The process of reviving bank calls for much cash to be invested on it and hence it becomes too expensive to take such a step. This has been catered for by spreading the period under which the funds are supposed to be consolidated. The period has been spread to eight years during which the banks of all participating countries are supposed to have contributed the €55 billion that is required to fund the project. They will first use the money to revive the Greece economy for the first year.
The committee that is to oversee the whole process of materializing the revival plan will have more power. It will be comprised of members from various states and it will be able to authorize the expenditure of €5 billion or less over which for it to authorize, it will need authorization of the super power members.
One of the major weaknesses of the agreement is that the funds will still remain under EU law. The members of the European parliament criticized this move and termed it as uncalled for as the funds ought to have been left at the hands of the member counties to manage it rather than a collective European Union.
If the funds were left on the member states to control it, it would have been more practical as they will have full control on when to spend it. Another weakness was the fact that some countries have much veto power. This look like a two man shows since these countries have very great power that can be equated to all other countries combined. They can make decisions on their own if they are able to come together regardless of the other countries. This would have been made better if the countries in the deal were all equal.
The new rules introduced by the EU will act to make sure that there will be fewer cases of banks in need of public money to save their situation; this is because EU will come in and either help them out or close down the bank.
Since the resolution fund set out is very small, EU will have to borrow money to cater for their needs and replenish the money spent (Esparza). Despite this, Eurozone governments will not club together to make it easier and cheaper to acquire a loan, they also do not plan on coming together jointly to deal with individual bank failures instead; they adopted new rules that force the creditors of the bank to take losses and single handily handle the burden of a bank collapse.
The EU central bank will recommend that the resolution authority intervenes in a particular bank, the decision by the resolution authority to intervene will be approved by the commission but if the commission disagrees, that’s when the members will have their full control. They will decide whether or not to intervene and rescue the situation.
The new process also seems too cumbersome to deal with major banking crisis but even if it is not perfect, it will allow timely and effective resolution the banks across the whole of Europe (McDonald). This will help reduce the era and demands of various countries and banks for bailouts as a result of various financial crises. The new plan will mostly discourage the weak banks from operations most of which have dragged down countries such as Ireland.
There are still claims of the resources being too small to deal with major banking crisis and hence there still remain a big controversy on the issue of control of the funds. The control of the funds is also a major issue due to the number of times that ministers can overturn a decision of the board. The instances where the national finance ministers can overturn the decisions of the board are very limited. This is a weak act as it gives full control of the board over the banking of a country while undermining the role of the ministers of the individual countries.
The agreement allowed member states to borrow from each other, but the deal would have been better if they had created deposit guarantee program. This would have made the agreement stronger by introducing a single account where the members can deposit funds and at times of financial distress or mild crisis, an individual member countries can borrow funds to save their situations. If Greece had a source for borrowing their funds, they would have borrowed and used the cash to regenerate themselves.
Most of the criticizers of the agreement claim that the deal was just a super power’s plan, and the others barely had anything to say on making the deal. On the other hand, the supporters of the deal termed it as a huge success after a hard fight. It remains to be seen whether the deal will be successful amidst all the critics it has faced from people in various sectors.
Fairless, Tom. "The European Union has struck a deal on the final leg of its banking union after all-night
talks." Online.wsj.com, 2014. Web. 26 Mar 2014.
McDonald. "Q&A: How the banking union plan will work - FT.com." Financial Times, 2014. Web. 26 Mar
Esparza, Alfonso. "European Banking Union Negotiations Completed." MarketPulse, 2014. Web. 26 Mar
Williams. "Deal reached on banking union | European Voice." Europeanvoice.com, 2014. Web. 26 Mar
Shiller, Robert and Adam Michnik. "What Makes Greece Special? by Daniel Gros." Project Syndicate,
2014. Web. 26 Mar 2014. <http://www.project-syndicate.org/commentary/daniel-gros-asks-why-the-greek-economy-remains-mired-in-recession>.