The beginning of September has ushered in yet more bad news for the European Union. Moody’s Investors Service, one of the top three ratings agencies, has changed its outlook on the EU’s AAA rating to negative. Given recent events this may not come as a surprise, but it could act as a further deterrent to investors.
Although the EU is currently managing to hold on to its coveted top rating Moody’s has warned that this could soon change. If the ratings agency decides to downgrade the most prominent budget backers in the bloc (the UK, the Netherlands, Germany and France) than the EU’s rating could also be cut.
As a result of repercussions caused by the euro-zone crisis and wider economic slowdown the outlooks for the UK, the Netherlands, Germany, France and Luxembourg have already been changed to negative.
The agency stated: ‘The negative outlook on the EU’s long-term ratings reflects the negative outlook on the AAA ratings of the member states with large contributions to the EU budget: Germany, France, the UK and the Netherlands, which together account for around 45 per cent of the EU’s budget revenue.’
Although Moody’s did comment that if the outlooks for the aforementioned countries returned to stable the outlook for the EU could follow suit, this new development can only intensify the pressure already piling on the EU and its main financier, the European Central Bank.
The most heavily indebted of the euro-zone nations are looking ahead to Thursday’s policy meeting which will reveal the specifics of the new debt purchasing scheme intended to aid them.
The largest economy in the euro-zone, on the other hand, is preoccupied with clashes in Brussels. On September 12th the European Commission will be putting forward developed proposals regarding nationwide ECB banking supervision. The European Commission has already made it apparent that the ECB will be expected to monitor all 6,000 institutions within the euro-zone and this hasn’t gone over well with Germany.
Although some have argued that this would be the first key step in creating a banking union capable of recapitalising euro-zone banks in troubled sectors, German Finance Minister Wolfgang Schaeuble has spoken out against giving the ECB such broad powers.
Schaeuble has seconded concerns voiced by the ECB itself and asserted that the scope of responsibility needed to be narrowed with efforts focused only on important institutions if the central bank is to make any headway. Around 200 banks are responsible for 95 per cent of banking assets held by the euro-zone and Schaeuble is not alone in thinking that the ECB taking control of thousands of banks is unnecessary.
Speaking on German radio Schaeuble insisted that a distinction needed to be made between major and lesser banks. He stated: ‘The ECB has itself said it does not have the potential to supervise the European Union’s 6,000 banks in the foreseeable future. With the bigger, systemically relevant banks … there is a chance that direct supervision by the ECB could be realised in a foreseeable period of time’.
As the proposals stand the European Commission expects the ECB to be overseeing the larger banking institutions by the close of 2012, Schaeuble felt that such a deadline was highly unrealistic given the complex work involved in initiating the process. He was quoted as saying; ‘It’s highly problematic to set January 1 as the due date. It will certainly not happen that way.’
Schaeuble also commented that if the proposals were approved then the ECB would need reorganisation in order to guarantee the separation of its responsibilities, saying: ‘We must separate the independence of monetary policy and the part of the banking supervision in the organisation of the ECB’.
However, Germany also has a personal motive behind its objections. The nation’s capital is particularly eager to retain control of its state-owned Landesbanks. Due to their close ties with businesses and politicians Berlin is against them falling under ECB supervision.
Brussels, on the other hand, is insistent that such action is necessary as even banks considered to be small can bring about worrying complications. Olli Rehn, commissioner for economic and monetary affairs, was firm when he said that ‘Even small banks can be systemic and cause financial turmoil.’ He cited Spain’s Bankia, Britain’s Northern Rock and Ireland’s Anglo Irish as notable examples of this.
If the plans are brought to fruition they will continue to stimulate debate. Under the conditions laid out by the proposal EU countries outside of the euro-zone can volunteer to have their banks supervised by the ECB. Whilst some believe this could strengthen the EU others are vehemently against the idea. Which way each nation will swing remains to be seen.