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A centralised banking resolution and supervision system is probably only the bare minimum of an economic infrastructure that a monetary union needs. But there are also problems with this approach. First, it would only ever be a solution if the proposal were not fudged. If one remembers the palaver over the recently agreed extension of EU-level financial supervision, it would be naive to believe the EU could agree on anything of such a scale, fudge-free.
I am hearing from several advocates of this proposal the view that it would be politically less problematic than a eurozone bond. I disagree. First of all, it would still be costly. A proper resolution authority would require access to some €1 trillion in funds. This would presumably have to be funded by a debt security, which for all intents and purposes constitutes a eurozone bond. They may call it a financial stability bond, or whatever, but who cares? If you think that a joint and several debt security is unacceptable in principle, then surely so is this proposal.
My guess is that among all crisis resolution choices, the centralisation of bank resolution and supervision will be among the least popular. Politically, it would be more realistic to expect the current rescue “umbrella” to take on that role. It would be a horrible fudge, and it would not solve the crisis. But it will be tried. It is technically possible, for example, for the European Stability Mechanism to lend money to Spain earmarked specifically for recapitalising the banking sector. But the ESM is constructed in such a way that Spain would become subject to the full blast of conditionality that any programme legally requires.
Spain would lose its sovereignty. Most important, such a programme would not solve the problem because it constitutes a swap from Spanish private debt to Spanish public debt. The ultimate responsibility for refinancing Spanish banking would remain in that country. A eurozone-wide bank resolution scheme would have the advantage – from a Spanish perspective – of the costs and risks inherent in a restructuring of the financial system being shared among all member states.
I am not saying a eurozone bank resolution fund is impossible. But it would have to be part of an immensely difficult political deal, in which various parties agree to do things they are definitely not willing to do today.
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