The European Disunion

messy euro

We could say that the Eurozone is the EU's most ambitious project so far. Despite its long journey, which includes a long assimilation process of the 17 currencies, the crisis has shown something that markets predicted–and that resulted in a general euro rejection in the first moments of its launching: the lack of a basic monetary union.

Although governments have supposedly advanced in the so-called banking union, a common fiscal policy remains a distant dream in the same way that real political union is a necessary element for the consolidation of the Eurozone.

The banking union initiative is based on a Euro member banks' (around 6,000) collective supervision. Last September, the European Commission announced that the European Central Bank would be in charge of that mission.

Deposit guarantee. Besides a unique monitoring system, a common deposit guarantee fund as well as a bank rescue mechanism should be created in order to provide direct financing if necessary without it having to go through the members. Thus the risk won't spread from the banking system to sovereign risk, as it's currently happening in Spain.

But despite the obvious need of a banking union within a monetary one and of the ECB's and international organization's support, it has been extremely difficult for politicians, central banks and banks to agree.

The Germans want the ECB to focus exclusively on systemic banks and leave the small ones alone, although they are the ones who have engaged in high risk investments and are in big trouble under national authorities supervision. United Kingdom and Sweden put major objections to this union because they have their own currencies and are not fully involved.

The need for a common supervisor, however, is absolutely necessary in view of the failure of the European Banking Authority in the 'stress test':  banks currently in bankruptcy completed them.

A vicious circle. There is a vicious circle between countries with sovereign debt problems and their banks. The latter feel the pressure to buy bonds that provide funds for bank bailouts.

In addition to this lack of common perspective, the Comission's way of designing a banking union is not legally solid. According to some leaks to specialized media, the European Council's first legal advisor thinks this reform is not legit since it intends to go beyond the Union Treaty regarding the amendment of the regulations of the ECB.

European leaders have always put patches to the monetary union gaps, without actually proposing a new treaty. They fear it would give more power to Brussels and therefore might be rejected by their national parliaments or their voters.

The German “Nein”. Germany does not want the ECB to be the direct supervisor. The consequences of choosing the wrong way for it would be serious. On one hand, the relationship between the ECB and national governments would get in a limbo -the current treaty does not tackle that subject-. On the other hand, it cannot be used to create a deposit guarantee fund, something that is crucial and urgent to stop the deposits outflow in countries in distress.

The ECB's independence may also be questioned. Supervision means access to private property data and this would go against an impartial monetary policy. That is why the Bundesbank, who absolutely wants to protect its monetary policy independence, is rejecting the EC's proposal for a banking union.

The role of the citizens. Outside observers might be right to find this process extremely dim, but it paints a very clear picture of the problem. The EU's construction is being carried without taking Europeans into account. EU leaders are avoiding a public consultation. That is a shortsighted vision that only takes electoral interests into account and therefore they only come up with irrational, unfounded solutions.

It will be difficult to accomplish real monetary unification without a real political union. And this requires the involvement of European citizens. Ignoring them makes no sense.


About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.