29 April 2018

Bloomberg: The Logical Next Step for Europe's Integration

The European Council at the end of June is widely seen as the last opportunity for some time to agree on an agenda of reforms. Afterwards, politicians will start to campaign ahead of the elections for the European Parliament next spring. With euroskeptic forces on the rise across the currency union, mainstream parties will have little appetite for negotiations over institutional reform in the run up to the vote. [...]

The creation of joint deposit insurance has been on the agenda at least since European leaders agreed to transfer responsibility for banking policy from national to EU level in 2012. This project -- referred to as Europe's "banking union" -- is formed of three pillars: the joint supervision of significant banks, a framework to wind down failing lenders and the creation of a European pot of money to guarantee deposits of up to 100,000 euros ($122,000). While the euro zone has taken the first two steps, the third has proven elusive. Germany and other low-debt countries such as the Netherlands fear they could be on the hook for troubles in banks in weaker member states.

These concerns are largely misplaced. Germany and the Netherlands have had their own recent history of severe banking crises. Joint deposit insurance would benefit them as much as Italy or Spain. A common safety net would also reassure all depositors that they will see their money back in case of a crisis; that helps reduce the risk of bank runs in all euro-zone countries. [...]

Leaders are discussing others ways to deepen monetary union ahead of the June summit too. There is talk of providing a backstop to the Single Resolution Fund (SRF), the pot of money used to wind down banks in crisis. At the moment, this is capped at 55 billion euros, an amount which will only be reached gradually. A meaningful backstop would see, for example, the SRF able to take money from the European Stability Mechanism (ESM), the much larger euro zone rescue fund. The EU would then have significant firepower to deal with a large bank in crisis (though, in the case of a very large lender such as Deutsche Bank there would remain concerns over the impact of a failure on the rest of the financial system). Another idea is to turn the ESM into a more flexible institution, which is capable of lending money to countries without them committing to fiscal adjustment and a full set of structural reforms.

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