The bailout business in the EU

by Sol Trumbo Vila*

Rescuing failed banks is often perceived as a political affair, but it is also a booming business. We see new cases every few months, like Monte di Piaschi last December, or we hear rumours about the collapse of giants like Deutsche bank.

Europeans may have become accustomed to bank bailouts, but the general public has little knowledge of the details of how rescue packages are designed and implemented or that contracts worth hundreds of millions of euro have been given to financial consultants to advise member states and EU institutions on how to rescue failed banks.

According to Eurostat data, €213 billion of taxpayers’ money – equivalent to the GDP of Finland and Luxembourg or more than 3 years of all military expenditures of the Russian Federation – has been permanently lost as a result of the various bailout packages in the EU. Statistics from the EC Directorate General for Competition indicate that more than €1.5 trillion was used in different forms of rescue packages between 2008-2014.

Meanwhile, citizens feel the consequences – less public money to sustain welfare institutions, like health care. The losses so far in the EU bailout programs could have paid for a full year of health care in Spain, Sweden, Austria, Greece and Poland, combined. Lack of access or decreasing quality of public services creates social pressures that soon become political tensions.

Germany, France and the Netherlands, key EU member states, have important elections in 2017. As with the Brexit vote last year, public debate in the three countries is focusing on migrants and refugees and the pressure they put on European welfare systems. Voters would do well to recall the magnitude and consequences of the EU’s bailout programs.

The Bail Out Business – published today by the progressive think-tank the Transnational Institute – is the most comprehensive and thorough analysis of who has benefited from EU rescue packages since the 2008 crisis. The report highlights the role of the Big Four audit firms (EY, Deloitte, KPMG and PWC) and a small coterie of financial consultancy firms in the business of designing and implementing bailout programs in EU member states.

The Big Four audit firms, which operate as a de facto oligopoly, together with a small coterie of financial advisory firms, have designed the most important rescue packages. But even in cases where bailout consultants gave poor or inaccurate advice on the allocation of state aid, there have been few consequences, even when state losses actually increased as a result. Bailout consultants have often been rewarded with new contracts despite repeated failures.

One possible explanation is the well-known problem of revolving door appointments in the EU, where former top finance executives hold leading positions in EU institutions and vice-versa. Another is that governments and EU institutions lack real alternatives. The increasing complexity of finance in recent decades, the widespread belief that self-regulation was the best model, and the gradual outsourcing of the formulation of financial legislation left governments unarmed when trouble arrived.  The firms in the bailout business remain almost uniquely positioned to deliver authoritative opinions on these matters.

The EU’s efforts to reduce the burden of managing failed banks on taxpayers (the Banking Union, for instance) are positive. However, the centralisation of supervision and decision-making in the European Central Bank has institutionalised the idea that failed banks should be rescued with taxpayer money. Furthermore, the ECB has relied on the firms of the bailout business to execute its supervisory mandate – for instance with stress tests – leading to further market concentration and greater dependency on a small group of firms.

With the exception of KPMG, all of these firms are based in the US and the UK, meaning that the ECB will be almost entirely dependent on the services of non-EU, private companies to develop basic supervisory activities when the UK leaves the EU.

The continuing pressure on public services across Europe will be part of pre-election debates in France, Germany and the Netherlands this year. Scrutinising the impact of immigration and casting about for scapegoats (as in the Brexit vote) for Europe’s troubles is lazy and xenophobic.

European policy must be contested with evidence and the financial sector should be compelled to work in the service of Europe’s citizens, instead of the other way around. As millions of European citizens cast their vote this year, candidates and representatives should make clear their position on the dysfunctional finance sector and what they intend to do about it. The Bail Out Business report can help to inform this.

*Sol Trumbo Vila is a researcher at the Transnational Institute, an independent, non-profit research centre recognised in The Netherlands and at European Union level

**First published in euractiv.com