Thursday, June 14, 2012

Here's an Extreme Idea: Shut Euro-Zone Central Banks

by Daniel Michaels

Wall Street Journal

June 14, 2012

For European leaders trying to reverse European banks' quickening retreat into their home markets, here is an extreme idea: Shut the euro zone's national central banks.

As officials across the European Union struggle to support weakening economies in Greece, Italy, Spain and other countries, one of the biggest new challenges they face is the unwillingness or inability of banks to lend money.

Financial institutions in the troubled southern countries are incapacitated by the threat of insolvency, as the recent bailout of Spanish banks demonstrates. Stronger lenders to the north are unwilling to step in for fear of pouring good money after bad and getting sucked deeper into the vortex of the widening credit crunch. As a result, years of integration in the EU's banking and financial industry have reversed.

In retrospect, the reason for this is clear: The EU created a common currency for 17 countries and the European Central Bank to control it, but never eliminated the significant national divisions that remain one level below. The euro zone's banks may lend in one currency, but they still answer to national regulators.


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