Banking union deal establishes the important principle that the eurozone can't write the rules for the rest of the EU and undermine the single market

(PresseBox) (London, ) EU finance ministers this morning reached an agreement on turning the ECB into a supervisor for Eurozone banks and on changing voting rules in the European Banking Authority (EBA). EU leaders meeting today and tomorrow are likely to rubber stamp the agreement. However, the deal still has to be approved by the European Parliament and some national parliaments.

While it represents a major step towards more integration in several ways, politically, this deal is significant in two key regards: first, for better or worse, it gives Germany political cover to put more cash on the line, moving the Eurozone closer to ESM-led recapitalisation of banks in the likes of Spain (although this has been delayed until 2014). Secondly, it establishes a very important precedent in how to reconcile further Eurozone integration, which the UK and others will not take part in, with the single market, which is the property of all 27 member states. For the first time, the EU has acknowledged the need for two-tier - and tailored - voting rights, depending on the individual countries' status either inside or outside the euro. It illustrates that the UK and other Eurozone "outs" aren't faced with an "all or nothing" choice, there is a road between joining the euro and 'isolation'.

1. New voting rules to avoid a fracture in the single market

For the UK and other non-eurozone countries, the creation of a Eurozone banking union comes with two risks. First, that EU banking rules are in future written by the eurozone-17 for all 27 member states, using an in-built majority in the EU's decision making process. Second, increased pressure for euro-denominated business - for example London-based clearing houses dealing with contracts in euros - to be supervised by the ECB and therefore forced to migrate inside the eurozone.

Though this morning's deal focused on the voting rules at the EBA, which primarily deals with technical standards for banks and disputes between national regulators (as opposed to wider financial regulation decided by the Council of Ministers or the European Parliament), it still established several very important principles and safeguards that could present a template for the future:

Agreement requires majority amongst both "ins" and "outs": As proposed by Open Europe, a "double majority" principle now applies. When the EBA makes decisions using QMV, (for example on technical standards), in addition to a qualified majority, there must be a simple majority of countries participating in the banking union ('ins') and a majority of countries that don't ('outs') in favour of the measure before it can pass. This means that the "ins" (the 17 Eurozone countries plus other countries that decide to join the banking union) can never use an inbuilt majority to impose their will on the "outs".

Safeguards against discrimination: Significantly, the regulation turning the ECB into a single supervisor specifically prohibits the ECB from discriminating against a single country or a group of countries, on the basis of their membership of the Single Currency. This will strengthen the legal principle that the banking union cannot undercut the single market.

Safeguards against Eurozone-bias in disputes: When the EBA reaches decisions on breaches of EU law or disputes between national supervisors, a decision has to be adopted by an independent panel of national supervisors who are not directly involved in the issue and confirmed by a simple majority of 'ins' and a simple majority of 'outs' (very close to what was proposed by Open Europe).

2. But there are still concerns

Is UK-based euro-denominated trade safe? The ECJ is currently considering whether the ECB's demands for London-based clearing houses to be based in the Eurozone and supervised by Eurozone authorities are consistent with single market rules. It is a court case with massive implications for the UK's future place in the EU and the principles of non-discrimination under the single market but also for the trillions of euro worth of business conducted in London. The new ECB regulation contains a provision stating that "tasks relating to the prudential supervision of Central Counterparties" does not fall under the ECB's purview. This represents an assurance that banking union does not further increase the pressure for euro transactions to be cleared within the eurozone. However, ultimately, the key will be how the ECJ rules.

Are the new voting rules safe? According to the agreement, if the number of 'outs' falls below four then the EBA voting rules will need to be reviewed - and could be completely rewritten. Currently only three countries have explicitly said they won't join the banking union: the UK, Sweden and the Czech Republic. If all the other countries decide to join, then these new voting rules might need to be changed almost immediately.

In addition, since the EBA regulation is decided by QMV and co-decision with the European Parliament, but the ECB regulation by unanimity, the UK loses much of its negotiating leverage once the latter is agreed. However, as a further guarantee that the UK will not be outvoted in future, there seems to a political agreement making clear that the revised voting modalities will need approval at the European Council (where unanimity applies). Though not a cast-iron legal guarantee, it will be hard to ignore.

3. This is only the beginning

This week's agreement is only the beginning of the long journey towards an EU banking union, with a common resolution fund being the next step. With the final membership of the Banking Union still uncertain - with countries like Sweden having left the door open to joining at a later date - and with the single market safeguards only applying to the EBA rather than the wider discussion on financial regulation, future negotiations about the relationship between the banking union and the single market are guaranteed. In particular, the question for the UK is whether it should seek to replicate these EBA safeguards at the Ministerial level (the Council of Ministers) or even seeking other safeguards such as an emergency brake for financial services regulation.


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