Why Macron's Win Is Good for Europe's Worst-Off Banks -- Heard on the Street

Emmanuel Macron's victory as French president should be good news for all European banks, not just those in France, but Greek and Italian ones too.

Victory for a mainstream candidate in France squashes the biggest political risk: the breakup of the eurozone threatened by far-right leader Marine Le Pen. But European bank stocks got most of the gains two weeks ago when that risk faded after the first round of the French vote.

Investors are now focused on the next step: that is, the ability of the strongly pro-Europe Mr. Macron, a former investment banker, to strengthen the German-French partnership at the heart of Europe and knit the whole bloc more tightly together.

Banking union is the thing that matters most for banks and their investors. This is the common legal and licensing framework that would allow lenders to collect deposits, make loans and sell other financial services seamlessly across borders. It doesn't exist today so a French euro is, in practice, still not fully interchangeable with a German, Italian or Greek one.

Banking union could improve flows of capital around Europe. It should also help consolidate thousands of smaller lenders and aid efficiency. But the most important thing it would do, according to Dirk Schoenmaker, senior fellow at the think-tank Bruegel, is give a better foundation to the whole financial system--and thus the eurozone itself--before another crisis.

The eurozone has a single bank supervisor and regulatory rule book, but it doesn't have a single deposit-insurance scheme or a single tax-funded backstop if things go wrong. That means banks and banking systems are always still national in death--which is like each U.S. state having to manage their own bank failures alone no matter how large.

France has a big interest in leading on this issue: after all of the eurozone's nine biggest banks by assets, five are French, according to S&P Capital IQ.

The obstacle is Europe's EUR1 trillion ($1.1 trillion) bad-debt pile and its concentration in Italy, Greece and Portugal. Northern European politicians and especially German ones reel from the idea of putting their taxpayers' cash at risk across borders and never will before this problem is cleaned up.

One way around this would be to a two-speed Europe: one where full banking union becomes a reality for those countries that are ready. Spain might make it in, Italy might not.

Others see this as unrealistic and divisive. They say the only solution is to allow Italy to do what Ireland and Spain did and use public money to fund a bad-loan clear-out.

The risk of not sorting out weak banking nations is that the eurozone becomes two-speed by default as countries with strong banks enjoy better access to capital and stronger economic growth: increasing the eurozone's political strains.

Greek and Italian bank stocks rose Monday morning, as investors bet that Mr. Macron recognizes this. But he must convince Germany, too.

Write to Paul J. Davies at paul.davies@wsj.com

(END) Dow Jones Newswires

May 08, 2017 07:25 ET (11:25 GMT)