Building up a new Europe through a banking union

, by Alessio Pisanò

Building up a new Europe through a banking union

In the view of European leaders the financial crisis started with banks and so it has to end with banks. The proposed banking union is the main answer to the crisis since European economy started to collapse and the Euro’s strength faded away. The European Commission proposal has been hailed by everybody in Brussels, from the Members of the European Parliament to the national leaders in the Council. This is all but obvious. It would have pleased more the EU lovers if we had an even more social and ideological response to the request “we need more Europe” echoed throughout the continent, but this is how it is. And undoubtedly we should take it as it is.

Take one fact: the current crisis derives from the financial and not an economic background. The ’real economy’, as analysts love to say, has been affected only at a later stage, but the bulk of the financial bubble grew up and imploded within banks. The paradigm ’international in life but national in death’ proved dangerous for the whole global economy. It started in 2008 in the US and is not over yet. For this reason the only response the EU could give to the crisis is basically financial. In the absence of a concrete financial response and new banking regulation the Euro itself will be short lived. Greece and Spain are calling for a greater intervention other than simple integration.

Yet history shows us how much economy can lead the way of a great political and social integration. The EU itself traces its origins from the European Coal and Steel Community (ECSC) and the European Economic Community (EEC) formed by six countries in 1958. Today it is the turn of banks. Given a proper banking union, Member states will be forced to set up a new political framework in order to cope with an international monetary supervisor. The EC proposal gives to the European Central Bank the main responsibility for the stability of the entire eurozone’s banking system. Until now the ECB has just lent massive amounts to banks without being able to measure their soundness. Unprecedented power is to be given to Frankfurt from Member states, a move which stops the creeping disintegration process which in turn is proving very expensive.

The ECB will also be partly responsible of the European Stability Mechanism (EMS), a common rescue fund, able to revive ailing banks and put zombie banks to death helping in so doing the States affected by their malfunctioning. It goes without saying that this would go hand in hand with more central control. In such a way, everybody in Europe get what they were looking for: Southern countries help, Northern ones control. Germany will be the one who will benefit the most from mutualising bank liabilities. Yet national authorities until today in charge of monitoring banks maintain too cozy a relation with banks, something that contributed to the collapse in Ireland and the current disastrous scenario in Spain.

The rescue of Spanish Bankia is going to cost 100 billion euros to the EU. 30 billion have already been allocated from the temporary European Financial Stability Facility (Efsf). Other billions will follow to save the national credit system on the verge of the collapse. In order to receive the international aid, the Spanish Prime Minister Mariano Rajoy announced the toughest deficit-reduction plan in recent Spanish history with the latest package of measures aimed at cutting 65 billion approved last Friday. Thousands of workers are in pain. Unemployment propped up as never before. This is the result of national overlooking on banks and banking huge shortfalls.

In the future context of a European banking union a scenario like this will never occur, or at least there are little chances for it to materialise. Banks will be obliged to keep a certain amount of capital – the European banking authority (EBA) is pushing for a compulsory 9% - and to finance a special rescue fund which will serve as a buffer in case of crisis. On the top of this, the ECB will supervise the situation. National authorities will be any more allowed to hide the problem at home such as occurred in Spain. Citizens of a country will be no more obliged to shoulder the entire cost of rescuing of a bank, running in billions. So, should Europeans start loving the banking union? Maybe not yet, but not entirely hating it either.

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