Euro climbs as Eurozone banking supervisor agreed

Welcome to the Pure FX account of the latest changes in the euro exchange rate, covering the 7th to 14th December 2012. This is intended as a brief guide to movements in the euro this week, to put you in the best position for when you exchange currencies.

Down, but not for long? The euro gained against the pound and US dollar this week, reversing all of last week’s losses, as Eurozone leaders agreed a single banking supervisor for the currency zone.

This takes the Eurozone a step closer to genuine fiscal union, and has been widely cheered by the financial markets.

To be sure though, it hardly means the Eurozone is out of the debt crisis woods, and the agreement masks big shortcomings that, in particular, could affect Spain, while dragging the euro down.

What this supervisor will do

What this week’s ‘banking supervisor’ agreement means is that, from 2014, the Eurozone’s biggest banks will no longer by supervised at the national level, but at the European, supranational level.

To be specific, the European Central Bank has been named the new pan-Eurozone supervisor. It will directly manage the 200 most important of the Eurozone’s 6,000 banks.

What this means in practice is that, say, for example, that Santander overstretches itself, and needs to bump up its capital levels. Well, the job of checking whether that’s the case, and then getting Santander to do it, will no longer fall to Spain, but the ECB.

Vote of confidence in the Eurozone

So, this is a big concession of national sovereignty to the European level. It means the countries of the Eurozone are giving up authority over some of their biggest institutions, and handing it to a European body.

From a symbolism point of view, that’s a pretty big vote of confidence in the political survival of the Eurozone. For that reason, the euro has climbed. Anything that looks like it’ll help the Eurozone stabilise will be lapped up by financial investors.

But equally, this could also be called a ‘halfway house’ measure, that does little to solve the Eurozone’s problems, while lacking democratic legitimacy.

Banks and governments still linked

In terms of being a ‘halfway house’ agreement, the trouble is this. Imagine the ECB checks Santander’s balance sheet, and finds the bank is in terrible danger of collapse, unless it receives emergency funds it can’t raise itself. In that case, who does the bill of propping up Santander go to?

Well, under this new arrangement, Spain would still be responsible for coughing up the cash. This agreement contains no ‘pooling’ of assets to help shore up Europe’s banks.

In other words, the original goal of setting up a banking union (i.e. to break the link between indebted governments and banks) has been missed. If Santander (or, more likely, Bankia) goes bankrupt, it could still drag Spain down with it.

No democratic legitimacy

Second, there’s also the fact that, though this banking supervisor might be needed to stabilise the Eurozone, no one voted for it, nor were Europe’s citizens consulted. This isn’t merely an academic point. So strongly did Sweden feel this banking supervisor is illegitimate, it pulled out of the scheme altogether, thereby join the UK.

For instance, Swedish’s Finance Minister Anders Borg said “It might be very popular among the eurocrats, but I think there are very few Europeans actually wanting these developments.”

Given that, it’s arguable this agreement stores up social tensions for the future, among people who want a greater degree of democratic legitimacy from Europe.

Trouble for the future, and a falling euro

So to sum up: sure, the euro has gained, because this agreement keeps the Eurozone from falling apart. But does that it a good agreement? And does it make it a legitimate agreement? Well, arguably not.

And those are facts that will not only return to haunt the Eurozone, but send the euro tumbling at some point too.

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