|
|
I can see only one mechanism that could force a collapse of the eurozone: a generalised bank run in several countries. A sovereign state would normally have instruments to handle the danger efficiently, before and after: through a deposit insurance, restrictions on bank withdrawals, and central bank emergency liquidity procedures. But the eurozone is not a state.
The best way to think about bank runs is the 1983 model by Douglas Diamond and Philip Dybvig, US professors of finance, who found that a bank run is one of several rational outcomes of a demand deposit contract between a saver and a bank. The bank lends long. Savers can withdraw at short notice. If a group of savers withdraws, a bank can normally handle this with ease, but if withdrawals exceed a certain threshold, the dynamics of a self-fulfilling bank run set in.
In this spirit, it is perfectly rational for Greek and Spanish savers to take their money out of the banks. If, in addition, there is speculation that Greece might leave the eurozone, then it is rational that Greek savers take their money out of the country.
What makes bank runs so lethal in the eurozone is the legal framework. The most important rights conferred by the EU to its citizens are the four fundamental freedoms – of movement of labour, goods, services, and capital. Article 66 of the Treaty on the Functioning of the European Union says the freedom of capital movement can be suspended but only in relation to third countries. The article can be invoked to stop Greek outflows to Switzerland, but not to Germany, at least not legally. That is one of the reasons why a eurozone exit cannot be legally accomplished inside the EU.
The only policy that can credibly counter the threat of a self-reinforcing bank run in the eurozone would be a eurozone-wide deposit insurance and bank resolution regime – at eurozone level. In other words, you have to take the banks – all the banks – out of the control of their home country. Such a scheme would, of course, not solve all of the eurozone’s problems. But it would halt the dynamics that could actually soon destroy it.
Full article (FT subscription required)