Banking Union Or Financial Repression? Europe Has Yet To Choose – Analysis


By Nicolas Véron

Europe’s policymakers, particularly on the continent, have long appeared to be in denial over the systemic banking fragility that is central to the region’s problems. They have first denied the existence of a homegrown banking problem by shifting all the blame to the Anglo-Saxons in 2007–09; and then by engaging in timid, less-than-credible stress tests while redirecting the blame at the Greek government and other lousy fiscal managers in the European South. The October 2011 ‘recapitalisation plan’ was in effect another episode of denial, for various reasons: it was based on an unreliable capital assessment; and it assumed full fair value on sovereign debt, in violation of any prudential principles. It also relied on overly volatile debt prices, a dubious basis for capital assessments even at amortized cost, given the huge uncertainties about the Eurozone’s future fiscal framework. The ECB then had little choice but to provide Europe’s entire banking system with an expanded lifeline of long-term liquidity, as it did in December to great effect with the three-year longer-term refinancing operations (LTROs).

In this sorry context, it is good news that a more lively debate seems to have emerged these days over the need for a European banking union as a necessary complement to a Eurozone fiscal union. Some observers see the emergence of an integrated European banking policy in the making (Kirkegaard 2012). This view may be too optimistic, however. There is widespread agreement among economists and European and international technocrats that Europe’s single financial market and monetary union cannot survive long-term without a banking union. Many observers had defended this view since before the crisis started, and the IMF articulated it more specifically in a landmark contribution two years ago (Fonteyne et al 2010). But the obstacles are political, not analytical, and they have not disappeared at all.

Put simply, Europe’s leaders are not ready to create a truly meaningful federal framework for banking policy because a critical mass of countries sees banks as a core instrument of national policy. Financial repression – namely, governments harnessing national financial systems to reduce their own financial difficulties to the detriment of savers and other users of financial services – is back from the history books, arguably even more so in the Eurozone than in other so-called advanced economies. A true banking union would encompass a federal framework for banking policy, including regulation, deposit insurance, and supervision and resolution at least for transnational banks. The catch is that this would also deprive national governments of many of their levers for financial repression. Other political considerations would also discourage such a union, including strong local links between banking and political establishments (eg, Germany or Spain) to economic nationalism (eg, France), that create huge political resistance to the very notion of a banking union.

An additional obstacle, not to be underestimated, is the discrepancy between the Eurozone and the EU27. A Eurozone-only banking union would be very difficult to square with the vision of a single EU market for financial services. Meanwhile, the European Banking Authority, created in 2011, happens to be located in London. But the UK is not ready to federalise decisions on banking supervision and resolution, partly because its big banks’ international activities are outside Europe rather than on the continent. There is no easy answer to this challenge, particularly because nobody knows what direction the UK will take vis-à-vis the EU over the medium term. Even policymakers who forcefully advocate a banking union (see for example Coeuré 2012) stop short of specifying whether they have a Eurozone or EU27 framework in mind. Senior policymakers acknowledge in private that this is a huge practical obstacle to progress on the way to a banking union, and it is not likely to be resolved any time soon.

Ultimately, monetary union cannot be sustainable without fiscal union and banking union, and these will not themselves be sustainable without a form of political union (Véron 2011). But there is a sequence here: monetary union first, (possibly) fiscal union next, and (if at all) banking union last. Contrary to many people’s intuitive perception, it is politically easier for a nation to renounce its own currency and even its fiscal sovereignty than its control on banks. The US history is not directly comparable but suggests the same sequence, as a truly integrated American national banking market did not exist until the second half of the 20th century. The apparent new emphasis on banking union in Europe’s policy debate must be welcomed, but we’re still a very, very long way from the endgame.

Nicolas Véron, Senior Fellow, Bruegel; and Visiting Fellow, Peterson Institute for International Economics


Coeuré, Benoît (2012), “The reform of financial regulation: Priorities from an ECB perspective”, Speech at AFME Conference in Paris, March 16

Fonteyne, Wim, Wouter Bossu, Luis Cortavarria-Checkley, Alessandro Giustiniani, Alessandro Gullo, Daniel Hardy, and Sean Kerr (2010), “Crisis Management and Resolution for a European Banking System”, Working Paper WP10/70, March

Kirkegaard, Jacob F (2012), “New Hope on Banking Regulation in Europe”, Peterson Institute for International Economics, 4 April.

Véron, Nicolas (2011), “The European Debt and Financial Crisis”, Testimony to the US Senate, September. was a policy portal set up by the Centre for Economic Policy Research ( in conjunction with a consortium of national sites. Vox aims to promote research-based policy analysis and commentary by leading scholars. New content can be found at

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