Photo: flickr / jurjen_nl
With massive capital outflows, yawning yield spreads, and failing banks, it seems clear that the European banking system is in crisis.In a speech today, ECB Executive Board member Peter Praet describes how the sovereign debt crisis has revealed an unstable and fragmented system that needs drastic reform.
He argued that ECB liquidity and individual country bailouts, like Spain’s efforts with Bankia, can shore things up in the short run, but won’t be enough.
Praet believes that “more is needed for the euro area to break the link between fiscal imbalances, financial fragmentation and financial instability.” He suggests that Europe move towards a “financial union” with a single authority to supervise and resolve large cross-border institutions, and common deposit insurance. The crisis might be just the thing to pressure leaders into needed actions.