The European Central Bank has taken control over 80% of the Eurozone banking sector. What could be the implications of the move, largely seen as a bold anti-crisis measure? Radio VR is discussing it with Peter Koenig, economist and former World Bank staff, currently based in Zürich, Switzerland.
In a historic move the European Central Bank (ECB) has taken on a new role of Europe's banking supervisor with direct control over more than 80 percent of total banking assets in the eurozone area. The move has been widely promoted as a confidence-building measure that could also help to prevent financial crises. "We are now better armed against imbalances in the banking system," read a statement made by German Finance Minister Wolfgang Schaeuble.
We are taking a closer look at the new system and the underlying trends it has actually revealed together with Peter Koenig economist and former World Bank staff.
Peter Koenig: This so-called watchdog – the SSM (the Single Supervisory Mechanism) – is one of the three pillars that the European Central Bank has created and that has become effective as of two days ago, I think, the 4th of November. Let’s talk about the most important one first, which is the SSM. It is not really an auditing mechanism. It is rather, as it says, a supervisory mechanism and it gives the ECB an enormous amount of power – the biggest boost of power the central bank has ever had since its creation.
Then, in parallel to that, it must be said, there are two more mechanisms that are set up, two more pillars – as they call them. One is the Single Resolution Mechanism (the SRM), which is the resolution for troubled banks or we may call it the bailing-in of troubled banks, the resolving of them. And the third one, which is not yet existing but it is planned to become effective on the 1st of January 2016, is the Single Resolution Fund (the SRS), which still depends on the funding of member countries to become effective.
Now, all of the Eurozone banks must participate in the former two, especially in the SSM, in the watchdog. They have no choice. Others, that are not part of the Eurozone, can participate if they meet certain criteria. What does that mean? That means that the ECB has a direct control over some 6 000 European banks, of which about 150 or so are important enough, and the criteria of importance is defined very clearly, to be supervised directly by the ECB, meaning by the new SSM. That means that the ECB has the full power of setting the regulations for the European banking system.
And let’s not forget, the ECB is intimately linked to the Wall Street and the Federal Reserve. As we know Mario Draghi – the President of the ECB – is the former Goldman Sachs Executive. And he’s actually carried out, in my opinion, created or enhanced the 2008-up to now crisis in particularly the southern European countries for the benefit of the Wall Street and the Dollar-based economy. So, the SSM, in my opinion, is a flagrant conflict of interests, because it actually serves itself, it doesn’t really serve the people.
What is clearly needed or would be needed is an independent audit of all the European banks, especially those 150 too-big-to-fail banks. And of course, the ECB itself should be audited independently. And what does “independently” mean? In my opinion, it would have to report to a special council of Eurozone countries, but independent of the European Commission. And this council would include parliamentary representation of member countries, the representation of the banking system industry, service sectors and, of course, the civil society.
But this is not going to happen. That would mean transferring power to the people, to those whose money is at play, to those who are really interested in the well functioning banking system and not a predatory one, as we know it today.
This step is in obvious violation of the free market principles and it definitely limits the ability of those major banks to make decisions in their own interests.
Peter Koenig: Absolutely!
So, do you think that still there could be a reaction?
Peter Koenig: Well, I really think there should be a reaction, but that could only come if the people or the parliaments of the member countries would stand up and say – we cannot accept this, because it interferes with the free market policy of our countries or the free banking system that we have set up.
You know, it goes even further. As it is, the SSM will enhance one of the little talked about European Commission’s resolutions. One of the last proud statements that Mr. Barroso – the ex-European Commissioner – made before he was replaced by Jean-Claude Juncker. He said: “We want to break the vicious link between sovereigns and their banks. In the future bankers’ losses should no longer become the people’s debt, putting into doubts the financial stability of the whole country.”
In other words, what he does say really is that in the future failed banks, especially the too-big-to-fail banks will no longer be bailed out, as they were so far by the taxpayers’ money, but they will be bailed in, meaning that the banks rescue themselves by taking the money from deposits and shareholders.
This has actually already happened. If you remember the case of Cyprus where this infamous “haircut” that the Europeans have laughed about, this “haircut” has actually cut the funding of deposits in excess of 100 000 Euros and it was accepted. People haven't really protested. The Europeans said – okay, it serves them right.
And shortly thereafter, in a very little mentioned statement that was accepted by the European Commissioner as the new norm, that in the future this is going to happen, this is going to be implemented and in the future the banks rescue themselves from deposits and shareholders.
This enormous power is interference into a sovereign country. I mean, this is dictated by the ECB. And one of the elements always talked about is the sovereign debt. In other words, the sovereignty of the countries includes the debt of the country, which means that the country should be able to deal with that debt on their own, not being dictated by Brussels or wherever the central bank is located or who dictates the central bank. I would almost call it criminal. It has nothing to do with the healthy banking system anymore.
As the matter of fact, the country like Greece, which was the first hit, its debt had the least importance for the European debt in general. I think at that time, in May 2008, if I remember it correctly, it was about 115% of the GDP. And the GDP of Greece was barely 2% of the Eurozone’s GDP. So, it was totally unimportant and manageable.
However, it was blown out of proportion by the ECB and by the European Commission, and, of course, by the IMF – the extended branch of the Federal Reserve and of the Wall Street. So, Greece had to lie down and to accept the draconian conditions.
However, what is also little known is that there is absolutely no rule in the ECB that would forbid a national central bank (because all of these European countries still have their own national banks) to print its own money. In other words, the Central Bank of Greece would have been able to print Euros themselves to rescue themselves at the much different terms than the ECB and the IMF imposed. So, this is little known and, of course, the people in power in Greece must have known about that. But they didn’t do anything about it, because they were a party in the deal.
So, all of these things I think should somehow come to the fore, because we are really living in, especially in this Dollar-based system which the Euro also belongs to, we live in a defunct, greedy, predatory monetary system, which, I believe, is destroying itself. But it is destroying itself, perhaps, not fast enough or, perhaps, fast enough for the people, but certainly at the great benefit for the bankers, because with every crisis we can see that the gap between the poor and the rich grows, and those who survive well and make more profit are the big banks.
The latest IMF report acknowledged that the austerity measures they’ve been recommending to most governments as a counter-crisis remedy appear to be a wrong approach. They are now saying that they needed to have focused more on growth strategy.
Peter Koenig: So, it is a little late to admit these mistakes. It is like mea culpa which nobody listens to anymore. We know that once a lie or a mistake has been made, it hangs out there, even though it is corrected later on. Nobody takes note of it anymore.
So, this trend of the centralization of the European banking sector, doesn’t it make it more vulnerable in its relations with the major US banks or — is the difference between the European and the American banking sectors is already negligible?
Peter Koenig: I think it enhances the links between the European and the American banking systems very clearly. I mean, it clearly establishes more rapport of power between the Wall Street and the European banks. I mean, that has already existed before, but now with the SSM which is actually being imposed by Draghi, who is basically a representative of Wall Street having been the Executive of Goldman Sachs, it is very clear that the whole European banking system is becoming more directly an extended branch of the Dollar-based system. It is becoming, I wouldn’t call it a slave of the Dollar-based system, but it will lose the total independence.
Which means that the Euro project is no longer relevant?
Peter Koenig: It will become less and less relevant. But I think there is something more behind this, which is the growing so-called crisis between Russia and the West. And I think that it is clearly an attempt of the US Dollar-based system – a system which is totally sick and I think most people know that, without doing much about it – to hold the Europeans hostage vis-à-vis Russia. Because there is a big chance, and I think in the long run it will happen, that Europe being between the US and Russia will logically tend to grow closer to Russia and to the east, than to the US.
The countries like Germany, they must clearly see a closer link for business and commerce, and trading with the east than with the US. And now, as you probably know, President Xi from China visited Germany, I think, last March and told Mrs. Merkel that he is opening a new Silk Road for commerce.
He basically offered Germany to be the westernmost flank of this new Silk Road that would link Germany through Russia, through the former Soviet republics, through the northern, eastern China and western China all the way to Shanghai. This is an enormous potential for business. And of course such an offer comes not out of nothing.
And I believe this Silk Road is already working, has already started and it would mean an enormous potential for Europe. And the US knows that, they know they need to seek any kind of disturbance within Europe in order to disrupt or try to disrupt the Russian economy. Fortunately, I believe, it will not be possible. Very fortunately, I think there already are too many strong links between Russia and China and the BRICS altogether.
Russia and China are already together. Today they have about 25% of the world GDP and control of a big portion, maybe 25-30% also, of the world population. With the BRICS together it is almost 50%. So, there is an enormous potential that one has to see, that will clearly detach itself from the Western monetary system.
And so, all these measures, like the SSM at the ECB come now not by accident, I believe. They have a clear role of taking the European banking system hostage vis-à-vis Russia, for example, or vis-à-vis Russia and China, if you want.