In this article, Nicolas Véron writes that an intense policy debate focuses on the options for euro area fiscal federalism, expansion of the role of the European Financial Stabilisation Facility (EFSF), eurobonds, or what European Central Bank President Jean-Claude Trichet, in a landmark speech in Aachen in June, called a Ministry of Finance for the European Union. But the banking side of the crisis also calls for far-reaching innovation. For it to be resolved, Europeans must define a model of banking federalism that would complement the existing monetary federalism and the objective of fiscal federalism. All are needed as components of European financial and economic policy.
Recommended changes:
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The EBA should be granted supervisory and resolution authority on all credit institutions, part of which it could in turn delegate to national supervisors with regard to banks with a local scope and the local operations of pan-European banks.
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The EBA’s own governance should be gradually reformed, in parallel with institutional change in the EU, to align its decision-making with the European public interest better.
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The EFSF should explicitly guarantee the eurozone’s national deposit insurance schemes, in order to prevent sovereign crises from triggering catastrophic retail bank runs.
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Member States should agree to dismantle all mechanisms that prevent cross-border mergers, so that regional consolidation can proceed.
In parallel with these structural changes, eurozone countries should pass emergency legislation to create a temporary instrument to help crisis resolution, following the successful examples of the US in 1989 and Sweden in 1993.
These measures would not be sufficient to solve the current crisis. But they are necessary.
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