Comment: City could prove main victim of EU bank rules

By GEORGE KEREVAN
Published on 20/10/2012 00:00

THIS week’s EU banking summit was a showdown between Europe’s pro-growth socialist group, led by France’s President Hollande, and Europe’s conservative German paymasters, led by Chancellor Angel Merkel.

The socialists appear to have won on points, but expect a rematch before the end of the year. Merkel went into the summit with a wider agenda than appointing the European Central Bank (ECB) as a pan-European bank supervisor (which was agreed).

Beforehand she demanded the appointment of a new super-commissioner to police the national budgets of profligate eurozone members. President Hollande – now more confident in the job – swatted that one aside.The eurozone is in a rush to set up a common bank supervisory framework policed by the ECB. Once in place, the ECB will be able to use the new European Stability Mechanism to recapitalise wobbly Spanish banks, and so finally rescue the euro. The new framework has three pillars: giving the ECB direct control of banks, a common deposit insurance scheme, and agreeing permanent rules on rescuing failed banks. The Germans are worried their taxpayers will have to fork out for the latter two. Friday’s summit only got as far as appointing the ECB – meaning another meeting before Christmas. Even this was a struggle. Germany was reluctant to see its popular savings and co-operative banks (the Sparkassen) come under ECB supervision. Merkel gave way and all 6,000 eurozone banks will come under the ECB. But when exactly?

A French “source” (i.e. Hollande) claimed the ECB could start recapitalising Spanish banks in the first quarter of 2013.

This was denied by the German side, who said it was “very unlikely”, meaning not before next September’s federal elections. Currently, Merkel’s coalition is trailing the three left parties in the polls.

Where does this leave the UK? A common eurozone banking system must surely eventually marginalise the City, which currently provides half of Europe’s investment banking needs. Some non-eurozone countries (e.g. Poland) are already planning to join the unified banking mechanism, further isolating Britain. The logic of economics, rather than politics, could push the UK closer to an in-out referendum on EU membership. European diplomats already talk about a “velvet divorce”.

Google paying a high price for smart phones

GOOGLE RR Donnelley & Sons Co, financial printers, and its website tells you “we craft custom solutions that are responsive to your needs, your budget, your goals”. Unfortunately, the firm accidentally released Google’s Q3 results before the markets closed on Thursday, resulting in 8 per cent being wiped off the search engine’s shares.

Actually, the real damage came less from the premature publication than what it contained. Google’s growth in advertising income is below expectation plus there are running losses at Motorola Mobility, its recently acquired phone business. Overall, operating profits are down 10.5 per cent on the Q3 2011.

Google’s main problem is that advertising is migrating to smart phones but advertisers pay less per click on a phone than they do on a desktop PC. Worse, people are searching more through their apps than through the Google search engine. That could be the kiss of death.

That said, the market probably over-reacted.