A strong eurozone needs a full banking union

Common deposit insurance will reduce the risk of future crises
 
 
 
New EU rules come into force on January 1 that will enable Europe’s financial authorities to deal with failing banks without shovelling the cost on to taxpayers. The launch of the EU’s so-called single resolution mechanism follows a significant expansion of the European Central Bank’s powers in November 2014, such that it now supervises all 5,500 eurozone banks.
 
These steps are two of the most useful initiatives that the EU adopted in response to the financial whirlwind that tore through the bloc after 2008, destabilising Europe’s banks and putting into question the survival of its monetary union. However, a third, more politically sensitive step towards a complete banking union is necessary in order to minimise the risk that fresh crises will erupt in the future and, if they do, to limit the consequences. In 2016 national governments and policymakers in Brussels should do their best to advance the goal of a common deposit insurance scheme in the 19- nation eurozone.

It will be easier said than done. Opposition to the early introduction of common deposit insurance is intense in Germany, which suspects that the scheme is a smokescreen for the proposition that its taxpayers and savers should cough up on behalf of depositors in other eurozone countries burdened with collapsing banks. Germany also contends that European policymakers should reduce excessive risk-taking in the financial sector before they proceed with risk-sharing measures, such as common deposit insurance.

Without doubt, certain precautions need to be in place before the eurozone launches common deposit insurance. Excessive risk is one issue. Some banks carry large amounts of government bonds on their balance sheets, despite the potentially lethal connection between sovereign debt and overstretched banks that was amply illustrated at the height of the eurozone crisis. More broadly, the banking sectors of some countries are still fragile and struggling with non-performing loans. They need to be on a firmer footing before the eurozone starts a common insurance scheme. Lastly, participating banks in all countries must step up and fund the scheme adequately.

All this said, Germany should recognise that a banking union which operates on two legs instead of three — common supervision, common resolution but not common deposit insurance — is a banking union that, in the last resort, will lack credibility. This is the implicit argument of the EU’s so-called “Five Presidents’ report”, which highlights common deposit insurance as a desirable and realistic objective for the financial sector.

The report, published last June, sets out a road map for full economic and monetary union by 2025, by which time the eurozone would be endowed with a common treasury and a “common macroeconomic stabilisation function” to help member states cope with shocks that cannot be managed at national level alone.

These and other proposals that envisage much greater centralisation of eurozone economic policymaking, albeit 10 years from now, lie beyond.

the boundaries of what is achievable in today’s political conditions in Europe. It may even be too ambitious to suggest, as does the Five Presidents’ report, that common deposit insurance, as well as a EU capital markets union, should be agreed as early as June 2017. However, the longer the delay in creating a common deposit insurance scheme, the longer the eurozone will remain vulnerable to financial shocks and contagion for which, one day, it may pay a far higher Price.

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