Open Europe’s Raoul Ruparel, writing in City A.M.
Whatever new twist the Eurozone crisis takes, the answers always seem to be another union: economic, fiscal, political, federal – you name it.
Outside Germany, a consensus has developed on what Mrs Merkel must do to preserve the single currency. It includes shifting from austerity to a far greater focus on economic growth; complementing the single currency with a banking union (with euro-wide deposit insurance, bank oversight and joint means for the recapitalisation or resolution of failing banks); and embracing a limited form of debt mutualisation to create a joint safe asset and allow peripheral economies the room gradually to reduce their debt burdens. This is the refrain from Washington, Beijing, London and indeed most of the capitals of the euro zone. Why hasn’t the continent’s canniest politician sprung into action?
Her critics cite timidity—and they are right on one count. Mrs Merkel has still never really explained to the German people that they face a choice between a repugnant idea (bailing out their undeserving peers) and a ruinous reality (the end of the euro)…
That’s one way of framing it. But the Economist is being disingenuous when it says that the “German people” “face a choice”. Last time I looked, the German people have never been offered any real choices on the management of the currency that they never wanted, were never given the chance to reject, and about which they have been lied to do from the start to however close we are to whatever happens next. They will not be given that opportunity now. And the Economist knows it.
The latest in this long and somewhat misguided list is a banking union. The idea is simple: a deposit guarantee scheme and a bank resolution fund would be created at the Eurozone level to backstop any systemically important bank which finds itself in a solvency crisis…
Firstly, any banking union would need to be backed up by strong Eurozone-wide financial regulation. All regulation would need to be harmonised to limit any moral hazard from the new guarantees underpinning financial institutions. This would also require very strong central enforcement mechanisms, to counter the temptation among national regulators to fudge the rules. This raises a second point. For a banking union to work, the Eurozone would need a whole new set of institutions, equipped with powers cutting deep into the economic sovereignty of its member states… Even if this was possible… it would be a time consuming exercise, even with crisis serving as a whip on Eurozone leaders’ backs.
Thirdly, though a banking union would address instability stemming from solvency issues, it would not deal with the redenomination risk. Consider the state of banks and the economy in Spain and Greece. The flight of deposits in Spain is at best based on a single institution’s insolvency (Bankia), but also possible concerns over the cash-strapped state’s ability to provide a backstop. The banking union would assuage these fears, although it is not a necessity to do so in the short term, a thorough recapitalisation of the banks with external assistance would have the same effect. However, in Greece the concerns stem from the country’s potential exit from the euro – an increased backstop would not stop this unless deposits were underwritten and banks guaranteed in euro terms indefinitely (even if Greece were to exit the euro). This would be impossibly complicated and would provide a huge burden on the other Eurozone states while making an exit far easier and more attractive for Greece – creating further moral hazard concerns.
And there’s more. Read the whole thing.