A federalised banking union
THE CRISIS afflicting much of the developed world for nigh on half a decade is, at base, a crisis generated by a financial system that grew too big, too fast. In the process it lent too much to too many borrowers who could not repay. This misallocation of capital has been disastrous. One of many consequences has been that in Europe alone, more than a dozen sovereign governments have had to resort to external bailouts.
Three of these countries are in the euro zone. While the euro did not cause the debt crisis, it has proved to be the perfect crisis mechanism transmission. Halting contagion requires radical action. In recent weeks, as the crisis has flared up yet again, a consensus is forming that if the euro is to be saved it will require – at a very minimum – the creation of a banking union. Such a union would involve responsibility for regulating the euro zone banking system moving from the national level to the European. Banks would contribute to a common fund that would be used to insure their depositors. A menu of options, on these issues and others, was set out by the European Commission yesterday.
Europe has, too, a ready model across the Atlantic. In the US, a banking failure in Texas or Massachusetts is not left to state governments to clean up because it has long been recognised that a properly integrated banking system does not run along state lines. The logic for federalising this function is as powerful in Europe as it has always been in the US.
Had such a system been in place from the time the euro was launched in 1999, it might have curbed the worst excesses of finance in the euro zone. It would certainly have prevented the heaping of almost all the losses of Irish banks on to the backs of Irish citizens alone. If a banking union were in place now, Spain would not be on the cusp of becoming the fourth euro area economy to seek a bailout.
The leaders of four of the EU’s most important institutions will present a “maste rplan” on the future of the euro at the EU leaders’ next summit later this month. That two of their number – the presidents of the European Commission and Central Bank – have already publicly called for a banking union means that it will be on the table within weeks. As ever, though, it is national leaders who will ultimately decide. Angela Merkel has frequently blocked radical moves for fear that, ultimately, German taxpayers would be on the hook for others’ blunders. This is a legitimate concern. Other countries have equally legitimate concerns.
One is the risk that a European regulator would be influenced or “captured” by the bloc’s largest banks. The influence of the financial lobby over politics is as powerful and pernicious as it is universal. That lobby would not cease to exist if Europe created a banking union. Although talk of different rules applying to the big countries in the EU is almost always poorly supported by the facts, there is danger in this case. It is one the Government should be alive to as the architecture of a euro zone banking union is drafted in the days, weeks and months ahead.