As the Cyprus crisis continues and other Eurozone haven states start to crumble, policy on the Continent is, at best, a “clap for Tinkerbelle” affair. Looking carefully away from any worrisome realities, Eurozone ministers consistently claim that, if we only just all believe really and truly, the good fairy of financial stability will flitter back on stage. The latest exhortations – Cyprus is unique and no insured depositor need ever fear Captain Hook – is just one more bedtime story designed to comfort credulous children.
Is talk of orderly resolution in Europe just a bedtime story? The events of last week combined with the continued inability of the Eurozone to decide on much of anything anytime tells me that the wine will flow on in Brussels at endless negotiations, but real policies that make anything meaningfully different there in real-time are way off, if ever likely to come. In one of the most startling statements this week, a senior ECB official said there was “little wrong” with the way the Eurozone initially handled Cyprus. Little wrong, one assumes other than mass riots in the streets, a government forced close to the brink and a near-panic in other weak nations. Look too at the spitting contest last week between Dutch and Luxembourg’s finance ministers. One says bank depositors and creditors should take losses in failures, doing so at home to prove the point. The other spat back that he will not tolerate “de-nationalized” banks, implying heavily that Russian oligarchs should come hither as soon as they can get their billions through Cyprus’s capital controls.
Is the Eurozone dealing meaningfully with this spat? Is Tinkerbelle really there? Of course not. Instead, negotiators talked yet again about how to craft a new supervisory framework through the European Central Bank, thinking perhaps that a plan here will suffice as a cure now. A plan had seemed set to advance, perhaps putting something like a cross-Eurozone supervisor and resolution scheme in place in 2014. But, then, the Germans heard the clock in the crocodile’s tummy. Instead of signing on to the latest incarnation of the ECB’s supervisory mandate, the Germans discovered that it needed not just a chairman subject to occasional appearances before national parliaments, but also a vice chair doomed to this same fate. Other “technical” issues have also sent the scheme back for yet another round of deliberations.
Are any of these substantive structural differences over what constitutes an effective Eurozone financial regulator? Of course not. Each of the stumbling blocks placed one after another before real rules that ensure meaningful regulation or resolution result from the same fundamental dilemma: the Euro is the only thing Zone nations have really in common.
Which brings me to the challenge all of these dithering deliberations pose in the U.S. I have long argued that the new orderly-liquidation authority in Dodd-Frank is a meaningful end to TBTF, admitting readily that OLA has some critical unresolved questions the FDIC must answer to ensure this assertion is ready for a road-test. One critical unknown is the integration of the U.S. resolution framework with those in other nations. If only bits and pieces of a big financial-services firm can be put through bankruptcy, then TBTF remains largely as before. The EU, with the possible exception of the U.K. and a few other nations in it, are telling us that banks there will remain, at best, subject to uncertain cross-border resolution protocols that put the Continent through repeated bouts of near-death stress. The FDIC can talk on at comfy cross-border resolution confabs – it had a cheery session last month with the European Commission – but talk won’t resolve any of the fundamental structural challenges that undermine a reasonable resolution regime anytime soon across the Eurozone. If the Eurozone wants to live on in Never-Never land, so be it. We have to grow up.