Premium

Warning over lack of risk-sharing across the eurozone

Marcon and Merkel
There are stark differences between France and Germany as to how financial risk should be shared

The eurozone has grown complacent about the need to share financial risk across member states, leaving it vulnerable to fresh crises, a top official has warned.

The warning comes ahead of crucial talks in Luxembourg this week. They will focus on trying to secure an agreement between member states' finance ministers on how to pursue deeper integration in the currency bloc.

“Willingness to act has waned as the economy has improved. There is a saying that the European Union has been built through crisis, but it does not have to be so,” said Valdis Dombrovskis, vice-president of the European Commission.

The issue of a bank deposit guarantee scheme remains a source of major tension between member states.

Germany is reluctant to sign up to this level of risk-sharing, which would effectively see its taxpayers underwriting money held in other member states’ banks. This would include the likes of Italy, where banks' balance sheets are closely tied to the state.

As a result, any increase in borrowing costs for Rome, which can often rise as a result of high public debt, puts stress on banks. Some German politicians regard this as effectively underwriting reckless fiscal policies of their fellow members.

Christine Lagarde, head of the International Monetary Fund that was heavily involved in the Greek bailout during its debt crisis, has repeatedly called on EU leaders to pursue true monetary union.

“Political priorities seem to have moved to other areas [than true monetary union]. I, for one, do not view this as acceptable. With the economic slowdown on everyone’s minds, let me say this clearly: now is the time to give euro area finance another big push,” Ms Lagarde said earlier this year.

A failure to tackle greater integration meant eurozone banks were “not safe enough” in the event of another financial crisis.

However, despite echoing her reprimands, Mr Dombrovskis said there was an "impasse" between member states over risk sharing: "No tangible progress has been made."

Another important area of disagreement between the 19 eurozone members are how a pan-bloc budget ought to be created and managed.

Northern member states, including Germany and the Dutch-led Hanseatic league, believe a budget should be small and limited only to investment projects.

However, France’s Emmanuel Macron backs a large budget, and a broad regime of taxes to fund it. These levies could cover areas as wide as the activities of digital giants and financial transactions.

The US tech industry has warned it will retaliate if EU officials attempt to harden their approach on taxing Silicon Valley giants and the issue is a major sticking point in trade discussions between Washington and Brussels.