Eurozone banking union 'will go up in smoke'

An agreement on the need to create a eurozone banking union was hailed as a great step forward at the last EU summit – but it is unlikely to work because it would turn member state governments into little more than spectators, writes Schadenfreude

After the last – but not final – crunch eurozone meeting on June 28, there was talk, now hushed in the August break, about a eurozone banking union. The European Central Bank, which is being given responsibility for the regulation of banking operations, is a champion of such a union. The rationale is that at least part of the financial crisis is down to the instability of banks, which has required governments to intervene on a national basis and on a massive scale to save their depositors.

A bank may not be allowed to juggle its funds between its branches in different countries in response to differential pressures. This illustrates a clash between the transnational business of the big banks and perceived national interests – and it is only one example of the inbuilt inconsistency between a common currency and continuing fiscal separatism.

In a banking union there would be, first, a single regulator of banking business. Second would be a deposit insurance scheme, paid for by the banks – with some ECB backing? Third there would be mutualisation of bank debt, so that it would not fall to national financial authorities to intervene to prevent impending banking failure. And finally, there would be a single baseline borrowing rate, although competition would not be stifled.

Conversely, there would be little or no national involvement in, or oversight of, the banking sector in a eurozone member, or of the effects of banking operations on national economies. Finance ministers would have no say, with power residing in the executive of the ECB. In return for having no liability or responsibility towards depositors – which is the whole idea – eurozone member governments would be simple spectators.

This is why the wheeze will be going up in smoke and why 172 German professors are up in arms against a eurozone banking union. They foresee a slew of demands on the Bundesbank if and when the ECB decides that the rescue mechanisms of the banking union need to be activated. Technocracy is all very well but the public expects to be involved through the people they thought they were electing to protect their welfare.