Euro crisis: Is banking union the way out?

, by FM Arouet

Euro crisis: Is banking union the way out?

The policy drive towards banking union – as opposed to mutualisation of sovereign debts – has a fair chance of breaking negative feedback loops between sovereigns and banks, and not only because euro area leaders seem to agree on it. However, this is not a long-term fix.

A potentially radical policy shift occurred at the June 2012 Euro Area summit

Euro Area (EA) leaders agreed on the creation of an “effective single supervisory mechanism” for “banks in the euro area” (EA Summit final statement) on 29 June 2012. As soon as this is established, the European Stability Mechanism (ESM) will be able to “recapitalise banks directly”.

Furthermore, heads of state declared themselves ready to use “the existing EFSF/ESM instruments in a flexible and efficient manner (…) for Member States respecting their (…) commitments.” These new policies, along with the €120bn growth package and the possible creation of a single recovery mechanism for banks at EU level, could end up being the great leap forward many expect, to end – at last – the euro crisis. But again, the devil is in the details. Only the implementation of these technical mechanisms will determine whether they are successful in breaking the vicious circle between banks and sovereigns and soothing the crisis.

These words from the EA Summit illustrate the equilibrium heads of state are seeking to establish between financial assistance on the one hand and commitment to reforms and deficit reduction on the other. This equilibrium is essential. Those arguing that Germany should simply underwrite all of Europe’s debt ignore that it simply doesn’t have the capacity to do so.

Furthermore, we should not only ask ourselves “how to solve the debt crisis?” but also “what triggered the debt crisis?” This brings up Europe’s painful truth: lack of structural reforms, structural fiscal irresponsibility and the absence of efficient control by the EU. Even if German Chancellor Angela Merkel concedes to the demands of France and euro-area peripheral countries, will that suddenly boost Spain’s competitiveness? Will it make Italy’s economy grow? Will it stop fiscal evasion in Greece? The answer is dramatically simple: no.

Europe’s euro crisis is deeply existential

Hopefully, the significant policy decisions taken recently by euro area leaders will be successful in inspiring investor confidence in Europe’s bond markets. If they do, it will be a victory for the European economy. But will it be a victory for European politics? Europe is facing radical choices that will shape the continent’s future. Hence, in order to be able to decide efficiently and democratically, we need to strengthen politics at the European level. We need truly European parties, not just confederations of national parties.

A group of 172 German economists recently issued an appeal to their fellow citizens, warning that the pooling together of bank debts – the so-called “banking union” – would be “three times as large as the sovereign debt” (€23 trillion).

It is wrong to ignore these appeals simply because they do not go in the “right” direction. It would be wrong to vote for such measures, hoping that people won’t notice, lost in the technicalities of financial jargon. EU leaders are continuing with the good old Monnet method’s “step by step” approach, and seem to go forward with integration reluctantly.

Angela Merkel doesn’t want to back the debts of peripheral countries, who themselves do not want to release some level of control over their national budgets. Yet they do it. But can you build a union on the mere force of “necessity”? Can you ask European nations to integrate their policies (and other features that go with it, such as socio-economic policies) just because “we have no other choice”? There are better ways to inspire people.

If the crisis is here to stay, let us have a say

This muddling through process doesn’t satisfy anyone. It is not only inefficient, but also potentially very dangerous. It makes extreme-right parties’ anti-EU voices and claims sound not too irrational in light of the never-ending euro crisis. It favours over-simplifications and caricatures that destroy the social links between Europeans, which EU founding fathers took decades to build. The populist parties arguing for euro and EU exit across Europe receive an increasing share of people’s votes. We must not let their intolerance and economic nonsense occupy the public space.

An increasing number of experts argue that Europe’s crisis will last up to 20 years, the time for Southern economies to reduce their deficits and find their way back to economic growth while trying not to default on their sovereign debt. This crisis is complex and likely to last. Hence, the direct election of EU decision-makers by all European citizens is definitely part of the solution. A refusal to go down this path will simply strengthen European citizens’ feeling that they do not have a grip on their future. You never know where such a path can lead.

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