The Banking Union can work at no cost

The Banking Union’ process was supposed to avoid public underwriting of financial woes. Any failure would be shored up by a common fund thus decoupling national budgets from the need to support ailing entities. Such hopes are rapidly fading, Germany proving in no mood to foot the ensuing bill.

Many observers claim that unless financial solidarity is well entrenched, the Banking Union’s effectiveness ranks close to zero. Following that reasoning you might as well conclude that sooner or later the Eurozone will implode. Sluggish growth combined with further financial instability would drive debt-ridden economies to the brink of sheer insolvency. As well-off partners feel increasingly weary of salvaging their neighbours, sovereign bankruptcy might emerge as the only way to escape from the current vicious circle. Greece has already restructured its debt. Others may be forced to follow a similar path depriving Euro-backed bonds of any meaning in terms of creditworthiness.

But the merits of a Banking Union are by no means circumscribed to pooling together money in order to save others from financial disarray. ECB supervision will gradually set up an even playing field at least for the biggest systemic banks. Being subject to common rules and surveillance inner value is likely to reflect their solvency regardless of the country they are located. Thus even if no European fund is established, entities from vulnerable countries will markedly improve their ability to ensure access to capital markets. This drive will improve their delivery, securing home proper financing.

National supervisors’ readiness to acknowledge the full scope of trouble facing financial entities is subject to open challenge. These doubts severely undermine confidence. The ECB across-the-board scrutiny will help to reduce the country risk associated to differing monitoring schemes. Should it further contribute to bridge the integration gap in the financial markets, it would undoubtedly help to overcome the current credit crunch eroding hopes of recovery in many European economies. It will not work out miracles but it might just save the day.

About the Author

JP Marin Arrese
Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.

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