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

    Comment number 6.

    Good thinking

    If we can agree, no individual state '\working', and no group 'working', changes needed:

    Equal citizens with agreed equal pay, needing as you imply to move for work

    As equal stakeholders, happy to share investment policy, compromise to deliver gradual infrastructure convergence, competitive access to distributed local investment funds, efficient large-scale 'where best'

  • rate this

    Comment number 4.

    EZ Banks put a push up bra on then in an tempt to change the figures

  • rate this

    Comment number 31.

    David Cameron made a good point recently, saying that a single currency means that money needs to flow from the richer countries to the poorer ones within the group of countries using the currency.

    The Euro was exchanged at rates far exceeding the actual worth of some of the host countries' old currencies. Germany benefited, so now has to pay.

  • rate this

    Comment number 60.

    There is treasure buried under every city in Europe. Why does no-one think of using it with a land value tax? Banks could lend landowners the money to pay it. See my letter to PM in for full argument.

  • rate this

    Comment number 100.

    R PESTON. Here you are trying to explain something new that may appear complicated to the lay person but may I suggest instead you explain again what DERIVATIVES & CREDIT DEFAULT SWAPS are & their MASSIVE relevance to all of this!

    As it seems that most people think that the DEBT problem is with those who have big overdrafts, personal loans, mortgages or those countries with large sovereign debt!


Comments 5 of 147



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