Most economists agree that the primary issue with the Eurozone is that it is a monetary union without the sufficient fiscal and regulatory institutions required to make it work.The banking system is a case in point. Banks in the Eurozone are interdependent and systemically fragile. A collapse or run on banks in one country could lead to failures throughout, but banks are mostly regulated and supervised by national authorities.
Economist Nicolas Véron has an interesting post up at Vox on the need for banking union and how it could be accomplished, here are his 3 priorities for Europe’s banking system:
- Banks need to share risks. Up to this point, European governments have reimbursed almost all creditors of failed banks. The system as it is rewards creditors of failed banks at the expense of European taxpayers.
- The Eurozone as a whole needs an organisation to act on its behalf when banks are failing. When an individual country’s regulators have failed and a systemic risk is present, the Eurozone needs to be able to take action independently.
- Cohesive action needs to be taken to prevent bank runs. Véron suggests having the EFSF or a successor guarantee the deposit insurance systems of hte nations of the Eurozone. This would greatly bolster the stability of the system.
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