Wednesday, May 30, 2012

EU Proposes 'Banking Union'

Wall Street Journal
May 30, 2012

The 17 countries that use the euro should consider setting up a "banking union" that allows them to share the burden of bank failures, the European Union's executive arm said Wednesday in a report on the currency union's crisis-fighting efforts.

To further stop expensive bank bailouts from pulling down governments' own finances, allowing the euro zone's new rescue fund to directly boost the capital of banks "might be envisaged," the European Commission said.

At the moment, any financial aid to prop up struggling banks would have to be requested by the firms' own government, pushing up its debt and deficit burden. The fear is that even if the government gets the required bank aid from the bailout fund, it would damage its efforts to raise money from the bond markets to finance the rest of its operations.

The Commission's suggestion for a banking union comes as vulnerable euro countries like Italy and Spain have seen borrowing costs jump in recent weeks while the euro's value has slumped. Spain's troubles, in particular, have been compounded by the weakness of banks suffering the effects of a property-market meltdown.


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