Europe’s Century of Crises Under Dollar Hegemony by Brendan Brown & Philippe Simonnot

Author:Brendan Brown & Philippe Simonnot
Language: eng
Format: epub
ISBN: 9783030466534
Publisher: Springer International Publishing

© The Author(s) 2020

B. Brown, P. SimonnotEurope's Century of Crises Under Dollar Hegemonyhttps://doi.org/10.1007/978-3-030-46653-4_17

17. Banking Union

Brendan Brown1 and Philippe Simonnot2

(1)Hudson Institute, Washington, DC, USA

(2)Paris, France

Question 27

Simonnot: Let’s come now to what is called the project of Banking Union as launched in 2012. The principle argument used by the advocates of this new European institution is that “banking nationalism” (to use their terminology) has been an aggravating factor in the financial crisis. This situation, they claim, translates into a one-to-one relationship between the financial situation of each State and that of the banks under its authority. A fragile banking system makes fragile the state on which it is dependent, and reciprocally, a state in financial difficulty puts in danger banks which are under its sovereignty. Hence, a banking union would seek to break these vicious circles—circles which they claim we do not see in the US where banks are not tied to one or other of the states in the federation. On top of these considerations there is a sociological analysis according to which there has been a perverse “concubinage” between the states and the banks at a national level in the sense that the same social classes make up the cabinets of government and the boards of the banks. For example, in France the graduates of the same well-known star “polytechnics” occupy the top posts in the Treasury, Bank of France, and the banks. What do you think of these analyses and the Banking Union project which follows from them?

Brown: The starting premise of a banking union in Europe is that banks need support, most explicitly in the form of deposit insurance, but also in terms of potential emergency access to public finances in situation of financial crisis. The opposite premise is that deposit insurance has been a curse—as has been contingency access to public funds in crisis. If neither were available, then banks whose business model involved the marketing of high-quality deposits to the public, which in virtually no circumstance would become irredeemable (temporarily or beyond), would pursue low-risk strategies (including high-equity capital, low or zero leverage) so as to build credibility. Banking union under such circumstances is an irrelevance.

How can we get from here to there? As of now Europe is plagued by a weak banking industry. Specifically, how could Italian banks be rebooted into free market banks no longer dependent on public support? A radical proposal would include widespread bankruptcy and restructuring together with removing impediments to new entry into the banking industry whether from inside Italy or outside. As a matter of social equity, “legacy” deposits would be protected. In sum, the road to competitive free market banking has many political hurdles along the way. In practice, as in so many other areas, the short-term solution has been to kick the can down the road. Crucially, the ECB has ensured (in conjunction with the German chancellery) that a huge flow of negative interest rate money continues into the Italian banks. The ultimate provider or guarantor is the German taxpayer.

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