For well over a century, the continent of Europe has tried to solves crises by introducing rules aimed at stopping that crisis from ever happening again, but all those rules have done is to sow the seeds of the next crisis. We can see this happening with startling clarity in the current proposal aimed at stopping the Eurocrisis — the proposal for banking union. The idea is that banks have become so tied to their countries’ governments, buying their debt to what seems like the exclusion of all other activities, that they are the source of Europe’s current woes. A banking union, with bank regulatory activities like supervision and deposit insurance centered in one place, would pool the risk and allow the continent to blow off some steam. Or so the theory goes. Of course, all banking union does is to introduce yet another, bigger source of moral hazard into the system, and fails to address the real problem of too much government. As such, it will fail to solve the Eurocrisis. There may be some temporary relief, but as we saw with the introduction of the Euro, the irresponsible governments of Europe will take that as license to indulge in whatever booms they can get away with, setting up bigger, wider busts a few years down the line.
Which is why, though it pains me to say it, British Prime Minister David Cameron was absolutely right in his assessment of banking union in Westminster yesterday. In answer to a question by Dr. Julian Lewis MP, he said:
Over time, the more there is a banking union and a fiscal union, the tighter the political union will be drawn, because — for instance — German voters having to stand behind Greek deposits, or French voters having to pay for the restructuring of a Spanish bank are deeply political questions. In my view, as the eurozone deepens its commitments, as is inevitable for a working single currency, there will be pressures for further political union, and for further treaties and treaty changes.
The fact is that banking union will lead to fiscal and political union of the Eurozone. Sensible countries like Britain and Sweden will have an opportunity to get out of this mess now before it engulfs them. As for Germany, which has managed its fiscal position well, it may be about to find out that more Europe is not the answer to the last question, not this one.
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