Wednesday, May 30, 2012

Europe's Banking Dis-Union

by Simon Nixon

Wall Street Journal

May 30, 2012

A banking union for Europe? What could possibly go wrong?

The European Commission, European Central Bank, the governments of Italy, Spain and Ireland, among others, have all now thrown their weight behind calls for a pan-European bank-resolution fund, possibly backed up by a pan-European deposit guarantee fund and pan-European supervisor.

Even Germany doesn't rule out allowing European bailout funds to inject capital directly into banks rather than channeling funds via national governments. But will governments be willing to make the necessary sacrifices of sovereignty to make this idea work?

Take the Spanish banking system: The idea of recapitalizing it with someone else's money is self-evidently attractive to Madrid since it will help break the link between sovereign and bank solvency, potentially allowing both to start funding themselves in the markets again. The idea is also superficially attractive to the rest of the euro zone since the cost of recapitalizing Spain's banks could cost Madrid market access, forcing it to seek a multiyear funding program that could stretch euro-zone bailout funds to a breaking point.


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