If the euro zone wants to survive as a currency union, it will have to be more deeply integrated – and a stable banking union is indispensable.
One huge problem now is the tenuous link between the financial sector and national governments.
In crises, governments save their banks from bankruptcy and incur debts. Then they borrow by issuing government bonds – largely through the same banks they saved. That connection is why the national supervisory practice has completely failed up to now. It has no chance of bailing out big banks without throwing financial markets and the economy into turmoil.
Europe needs a sustainable solution for a banking union. It could follow the U.S. model – the Federal Deposit Insurance Corp. – which has long been responsible for watching over banks in financial trouble. Unlike in Europe, if a bank closes in the United States, the FDIC takes over and “switches off the lights.”
But what would a strong banking union in the euro zone look like?