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Europe's Deeply Flawed Banking Union


Headquarters of the European Central Bank in Frankfurt

Photograph by Krisztian Bocsi/Bloomberg

Headquarters of the European Central Bank in Frankfurt

Europe is putting the finishing touches on a banking union with the aim of restoring confidence in the euro area’s banks, reviving lending, and ensuring the common currency’s survival. It’s a step forward that doesn’t go nearly far enough.

In approving a raft of banking union legislation, the European Parliament has ratified an important understanding: If the member states of the euro area want to share a currency, they’ll have to share some risks and responsibilities. Among other things, they must create a central authority to supervise banks throughout the euro area and pool resources should there be the need to rescue a bank whose collapse could overwhelm a government’s finances.

The new laws fall short. Consider the Single Resolution Fund, set up to help recapitalize banks if their losses exceed what their shareholders and creditors can absorb. It will contain €55 billion ($76 billion), with authority to borrow more in an emergency. The euro area’s largest banks have assets exceeding €1 trillion, and borrowing from private investors would be difficult in a crisis. Rescuing a bank that big would require a lot more money.

The banking union was also supposed to guarantee deposits throughout the euro area to prevent bank runs that happened in Greece and Spain in 2011. That provision has been dropped, apparently because countries have their own deposit insurance plans. So in a crisis, it could happen again that a euro in a Greek bank would be worth less than a euro in a German bank. That isn’t what “common currency” was supposed to mean.

The supranational authority vested in the European Central Bank leaves much to be desired as well. If the ECB wants to take over a failing institution and inject money from the resolution fund, the banking union’s member states have the power to block the move.

Europe has no time for half measures. Lending is down in the euro area over the past two years, and many governments have big debt loads. Should trouble flare up again, Europe’s leaders will find themselves behind the curve once more.

To read Mark Buchanan on economists’ new math and A. Gary Shilling on deflation in Europe, go to: Bloomberg.com/view.


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