Eurozone’s banking union blown up

 

The thing about a formal banking union for the eurozone, of the sort recommended by Jose Manuel Barroso, President of the European Commission, is that it is a covert or backdoor form of fiscal union (see today's FT for more on this).

In a banking union, eurozone states would pool their resources to act as the insurers or guarantors of last resort for the deposits in eurozone banks and for bailouts of banks that get into difficulties (this would be true, even if banks subscribe to a deposit protection fund, because there would never be enough in this fund to deal with all possible crises).

The economic effect would therefore be more-or-less identical to eurozone governments borrowing collectively by issuing so-called eurobonds. Here is why: the biggest lenders to eurozone governments are eurozone banks; so in a banking union, eurozone governments would club together to - in effect - collectively give banks the resources to lend to individual governments.

So - and I hope you are still with me - since Germany is opposed to using its financial strength to help other countries borrow through the sale of eurobonds, Germany would inevitably be opposed to helping other countries borrow by underwriting their respective banks.

And so it has proved - with the Bundesbank signalling its opposition to a banking union of this sort.

All of which is a long-winded way of explaining why the borrowing costs of the government perceived to be most financially over-stretched, Spain, have soared today to record levels - in that the dispute over whether to go for a banking union shows that the eurozone is as far as ever it was from a fundamental solution to its woes.

 
Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this
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    Comment number 147.

    @ JC is JD
    Thanks for clearing up the basics(alas my field is engineering not finance), i had a vague understanding of derivatives and the fact banks basically trade on endless debt (think that was your point). My point although mis-worded was that banks are effectively trading in nothing and earning profits on the back of this surely someone has to say this can't continue it's insane.

  • rate this
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    Comment number 146.

    The euro was destined to fail, so best let it do so. Too much pressure due to wildly varying economies attempting to conform to a single ideal. Let the project die, no one here (UK) voted for it anyway. Get back to a single market; we voted for that. Maybe a common defence pact, in case Boris decides to pop over for a chat.

  • rate this
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    Comment number 145.

    ASM @144

    Colder north requires work to keep warm
    Half of work goes to get fuel for stove
    Snowed-in most of winter

    Work twice as hard in heat of south
    Late-to-bed culture exhausts
    No summer - working

    Seriously, life evens-out

    Low wages, Unemployment, Benefits running-out

    No joke

    Faulty terms, unfair start in 1999, reverse of impossible 'convergence', top-culture tax avoidance 'catching'

  • rate this
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    Comment number 144.

    Re north/south Europe.

    The power shift north from the Med Venice/Florence is at the heart of what people now call cultural differences.Once a route around Africa to the east & 'discovery' of America. The spice route decline set in.
    You also have English & Dutch pirates (privateers) raiding Spanish & Portuguese ships laden with gold & silver.e.g. Dutch west india comp. seized 22/30 ships in1627

  • rate this
    0

    Comment number 143.

    John Lloyd @129
    "coincidences"

    Might it be that early northern industrial strength, from timber and mining, generated independence, work discipline, and resentment of Rome, so precipitating 'doctrinal' Protestantism?

    That said, no call to deny equality between miners, waiters, bankers, or their families; and no call to expect or demand equal capitalisation, equal returns, beach car-plants, etc

 

Comments 5 of 147

 

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