Tuesday, June 12, 2012
Eurozone’s banking union blown up
June 12, 2012
The thing about a formal banking union for the eurozone, of the sort recommended by Jose Manuel Barroso, President of the European Commission, is that it is a covert or backdoor form of fiscal union (see today's FT for more on this).
In a banking union, eurozone states would pool their resources to act as the insurers or guarantors of last resort for the deposits in eurozone banks and for bailouts of banks that get into difficulties (this would be true, even if banks subscribe to a deposit protection fund, because there would never be enough in this fund to deal with all possible crises).
The economic effect would therefore be more-or-less identical to eurozone governments borrowing collectively by issuing so-called eurobonds. Here is why: the biggest lenders to eurozone governments are eurozone banks; so in a banking union, eurozone governments would club together to - in effect - collectively give banks the resources to lend to individual governments.