European Depositors Get a Boost from German Politics

(Bloomberg Opinion) -- Germany's dismal coalition politics may help unlock progress in talks on the European banking union. Finance Minister Olaf Scholz's apparent mandate to negotiate a common deposit reinsurance scheme for Europe could help him win the leadership of the Social Democratic Party (SPD) and keep the shaky government, in which the SPD is the junior  partner, going for another two years.

Scholz laid out his plan for the reinsurance scheme in an op-ed in the Financial Times. Even though he wrote it was “no small step for a German finance minister,” the proposal isn't particularly generous. A European reinsurance fund would only step in if a national deposit insurance scheme's resources are exhausted. In reality, if an EU member state finds itself in such dire straits, it's already likely to receive help from the European Stability Mechanism. German taxpayers won't be on the hook for payouts to Italian, Greek or Portuguese bank depositors, and Germany will still only agree to the scheme under certain conditions, including tough ones such as requiring banks to hold reserves against government bond purchases and the uniform taxation of banks.

The scheme bears all the hallmarks of the kind of cumbersome compromise favored by Chancellor Angela Merkel — one nobody really likes but which can break the banking union deadlock. It also looks like a Merkel gift to Scholz at just the right political moment.

Late last month, Scholz and his running mate Klara Geywitz won a first-round vote in the SPD's party leadership race by a surprisingly narrow margin, garnering 22.68% of the party members' vote against 21.04% for the runners-up. The run-off will be held between Nov. 19 and 29. It can be the undoing of the governing coalition if the wrong pair wins: one of the opposition candidates, Norbert Walter-Borjans, has said the coalition has “no future.” 

Many SPD members' problem with the coalition is that it appears to have destroyed the party's electoral support because, as the junior partner of Merkel's Christian Democratic Union (CDU), it's unable to push through its center-left agenda. All it does is prop up an increasingly fatigued and indecisive Merkel and a flailing CDU which, in turn, is losing support to the Greens and the nationalist  Alternative for Germany party.

Scholz's experience within the coalition is a case in point. The European reinsurance scheme that's really dear to his heart, one he'd have liked to be his signature project, had nothing to do with the banking union. It was a plan for a Europe-wide unemployment backstop, a fund into which all member states would pay and on which they could draw if their unemployment insurance schemes run into financial trouble. Technically, it was a lot like Scholz's deposit insurance proposal. Last year, however, Merkel's office and the CDU turned down the plan for the same reasons that they've opposed common deposit insurance — because it would put up German money to solve problems caused presumably by other countries' poor financial management.

Scholz is unhappy with the coalition. He said in a recent interview that Germany needs a government without the CDU, which “lies  like mildew over the republic.” But he doesn't want to dissolve the coalition before the scheduled 2021 election because he says the SPD can still get things done — for example, push through its version of a basic pension to be paid to everyone who's worked for at least 35 years, on which compromise with the CDU has proved elusive so far. 

All the SPD leadership candidates have said the pension matter would be important for the coalition's future. But while Merkel can't gift a deal on that to Scholz just yet, she and her party can at least offer progress on the deposit reinsurance proposal. Its beauty is that other EU countries don't have the time to shoot it down before the SPD leadership run-off — and in the meantime, it gives credence to Scholz's position that the SPD can lead on important initiatives, including European-level ones.

Scholz's victory in the leadership vote should allow Merkel to serve out her final term in office; he's a relatively comfortable partner for her in talks on matters ranging from pensions to fiscal easing in case of a  recession. His banking union proposal should be read in that context; it's more useful for Germany's political stability in the next couple of years than for European depositors — who could,  of course, also benefit in the end.

To contact the editor responsible for this story: Therese Raphael at traphael4@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leonid Bershidsky is Bloomberg Opinion's Europe columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.

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