Europe’s sovereign funk denies solutions

Thursday, June 14, 2012
By Paul Martin

It’s hard to know whether to laugh or cry. Every week, seemingly, brings some new miracle cure, some further quack remedy, produced as if from the back of a lorry, which promises finally to fix the eurozone debt crisis once and for all.

By Jeremy Warner
13 Jun 2012

A little while back, it was eurobonds, then it was European Central Bank intervention in sovereign bond markets, followed by project bonds, use of European bail-out funds for direct recapitalisation of struggling periphery banks, and so on. It’s desperate stuff.
The favoured fix du jour is that of rapid progression to a fully-fledged banking union, or federal banking system – a plan which the European Commission seems to think it could have up and running by the beginning of next year. This one lasted even less time than the others before being shot down in flames by the big wigs of Berlin and Frankfurt.

No sooner had José Manuel Barroso, president of the European Commission, published his blueprint for a banking union than it was ripped to bits by a combination of the Bundesbank and the German political hierarchy. Angela Merkel and her finance minister, Wolfgang Schäeuble, were particularly scathing in their analysis.

You almost feel sorry for Mr Barroso. The crisis has sidelined Brussels and made it apparently irrelevant. However ineptly, national governments have taken control of the fire brigade. Like the distraction of a financial transactions tax, the banking union proposal is an attempt by the commission to get back into the action.

Admittedly, on paper it’s actually not such a bad idea. Indeed, it’s textbook stuff. You cannot have a successful monetary union without a federal banking system, for unless the entire edifice is underwritten collectively by the whole, you are bound to get, when banks become stressed, the sort of cross-border flight of capital we see in the eurozone today.

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