Tuesday, January 10, 2017

The eurocrisis threatens the core tenet of the European Union: the ban on State Aid

That the eurocrisis has led to a continuous watering down of EU budgetary deficit rules, fiscal transfers through bailout schemes and monetary transfers through the ECB, needs little explanation.

That the EU wasn't going to be serious about applying its own rules on bail-ins when banks get into trouble, could also be foreseen. The institution itself in charge of supervising eurozone banks, the ECB, is in the business of propping up unsustainable banks, as it for example allowed Greece and other eurozone states to prop up banks through the "emergency liquididity assistance" (ELA) scheme which allows national central banks to print euros to prop up banks. The "l" in ELA stands for "liquid", so this scheme is obviously not meant to prop up insolvent banks like those in Greece. Even if there would be a  "Chinese wall" between the office of the ECB's supervisor-in-charge, Elke K├Ânig, and that of ECB President Mario Draghi, there may not be a Chinese wall between their offices and the reality that bank failures would cause great disruption and that an armada of politicians is always pushing to kick the can another few years down the road.

Now the crisis of the EU's common currency project has started to undermine the central core tenet of the European Union: competition policy. 

Then I'm not speaking of the politicised and dysfunctional anti-trust department of DG Competition. The EU's Competition Commissioner, Margrethe Vestager (picture), herself, has stated that "I find it only natural that competition policy is political", with as a clear result serious political tension with the United States.

I'm thinking of the State Aid department of the European Commission, which is understaffed, unlike DG Kumbaya and DG Posturing, and responsible for making sure EU member states do not provide any favourable treatment to any market participants, as this would distort fair competition in Europe.

EU state aid policy is far from perfect, but if there is an area where the EU Commission should act, it is here, given that its actions are largely about stopping member states from doing something, not from imposing certain one-size-fits all instructions. It's one thing that the ECB refuses to do its supervisory job at the very first big test - reminding of the Roman saying Quis custodiet ipsos custodes or "Who will guard the guards themselves"? It's an another that with the arrival of the EBRRD framework - once the quid pro quo for Northern Europe bailing out Spanish banks, we could maybe hope that the EU Commission would at least not bend immediately when facing aggressive pressure from Italian Prime Ministers. How wrong were we.

Bloomberg reports that the Italian 8.8 billion-euro bailout of the (ECB-fueled) world's oldest bank, Monte dei Paschi di Siena, "an institution that has been on the verge of collapse for years" and "precisely a case for resolution”, according to the Greens in the European Parliament, has already cleared the first state aid hurdle. A bailout is permitted under the EU Commission's already loose state aid rules when a “crisis situation persists” in the EU. The Commission hasn’t revised that assessment in the three and a half years since it declared a crisis at the time of the trouble in Cyprus in 2013, despite the fact that Commissioner Vestager promised in 2014 that “we have to come back to the usual application of state-aid control in the banking sector” while she was “ready to do so as soon as the market conditions permit.”

Crisis truly is the health of the State, or at least in this case, of the Italian State. If the EU continues to undermine the core of what it stands for, people will start wondering what it's for.

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