German eurozone banking plan wins cautious backing

European policymakers mull proposal for common deposit reinsurance scheme

European financial policymakers and supervisors have given a cautious welcome to proposals from the German finance minister Olaf Scholz to create a common deposit reinsurance scheme for the single currency zone.

But there was concern among some conservatives in Angela Merkel’s Christian Democratic Union, who said they had been blindsided by Mr Scholz’s intervention and warned it could destabilise the “grand coalition” government in Berlin.

“We still need to erect the banking union’s third pillar: European deposit insurance,” said Andrea Enria, head of the ECB’S Single Supervisory Mechanism, which oversees the eurozone’s biggest banks. “We hope to see signs that there is a little bit more openness to move ahead in this project.”

Writing in the Financial Times, Mr Scholz offered hope of a breakthrough in plans to create a full eurozone banking union by ending Berlin’s opposition to a common scheme to protect savers’ deposits. He said it was “no small step for a German finance minister”.

However, he placed a caveat on his proposals with calls for restrictions on banks’ sovereign debt holdings and non-performing loans, demands that are bound to spark concern in EU member states with weaker finances or fragile banking sectors.

There is likely to be strong opposition from within the German government, too. Mr Scholz is a social democrat, and his CDU coalition partners are strongly resistant to the concept of a eurozone deposit insurance scheme.

A CDU adviser said Mr Scholz’s paper had come as a “complete surprise” to the Christian Democrats’ parliamentary group and would destabilise a coalition already roiled by disagreements over pension reform and foreign policy.

The adviser said the CDU was still insisting that a common deposit insurance scheme could only be introduced once non-performing loans on bank balance sheets had been reduced. “These processes must happen in sequence, not in parallel,” he said.

Asked whether Mr Scholz’s opinion piece in the FT had been co-ordinated with Ms Merkel, her spokesman Steffen Seibert said it was merely a “contribution to a discussion”. “It will feed into the discussion both internationally and within the government,” he said.

However Mr Enria, who was speaking at an ECB conference on Wednesday, welcomed Mr Scholz’s apparent change of heart, saying: “Depositors must be sure that their money is well protected no matter whether it is deposited with a bank in France, Italy, Greece or Germany.”

German banks have been vocal opponents of a eurozone deposit insurance scheme. However, HansWalter Peters, head of the Association of German Banks, welcomed Mr Scholz’s proposals on Wednesday, saying: “The fact that the German ministry of finance is distancing itself from the European Commission’s previous proposal for a communitisation of deposit guarantee schemes is an important step in the right direction.”