A European Banking Union Could Save the Euro

A common currency requires an integrated banking market that delinks sovereigns from financial institutions.


The European Central Bank ECB building in Frankfurt, Germany.

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Rachel Epstein is an associate professor at the Josef Korbel School of International Studies at the University of Denver.

In recent weeks, the European Central Bank and number of European policy makers have gravitated toward the idea of creating a European banking union to alleviate the ongoing debt and currency crisis. A banking union would put in place collective deposit insurance and bank resolution schemes. It would consolidate supervision, most likely in the European Central Bank. These are good ideas. They would help break the negative spirals between sovereigns and their banks that have led Ireland, Greece, Spain, and Italy either into economic calamity or to its brink.

One issue critical to a banking union's success, however, and noticeably absent from national politicians' discussion to date, is the contentious matter of bank ownership. For Western European states, as for much of the rest of the world, with the striking exception of Central and Eastern Europe, bank ownership is the last bastion of national control in a sea of globalizing trends. States have privatized and liberalized capital and trade flows. But for the most part they have refused to let finance be entirely subject to markets.

[See a collection of political cartoons on the European debt crisis.]

As long as banks have national identities, lend disproportionately to their own sovereigns, and provide financial inclusion to their home markets by lending to industry, municipalities, and home buyers, any collective insurance scheme that has to pay out will look like—and be politically perceived as—a transfer from one set of European states to another. The problem of country transfers points to the political infeasibility of a banking union that works—until the national identities of banks in Europe disappear.

Given the sources and history of bank protectionism in Western Europe, however, relieving banks of their national attachments would require a major cultural shift, not to mention industrial reorganization in select cases. To protect their national political economies, France and Germany have long used thin markets for corporate control to resist unwanted takeover bids of banks and other firms. In Italy and Spain, a strategy since the 1980s has been to encourage domestic bank consolidation followed by global expansion. Thus two mid-sized European economies have produced some of the world's biggest multinational banking groups. Santander of Spain and UniCredit of Italy are not only too big to fail, but also too big to take over. That was exactly the point.

Even the United Kingdom, often cited as Western Europe's most orthodox liberal economy and generally open to foreign bank ownership, has staked out certain areas of lending in which domestic players dominate. Thus in the small- and medium-sized enterprise segment, which supports the bulk of British corporations and also employment, just four U.K. banks have access.

[See a collection of political cartoons on the economy.]

If states are prepared to allow goods, services, and capital to gush across borders, why not accept foreign bank ownership on a grand scale, as well? Especially when the common currency is under threat? Answers lie in the financial and labor market structures of states as well as their own brands of economic nationalism. But the more general point is that states fear the loss of competitiveness and power in the international system that theoretically comes with foreign domination in finance. Foreign bank ownership limits the extent to which states can intervene in the economy. It eliminates a natural constituency for a specific sovereign's debt. It leaves countries vulnerable to funding flights in economic crises. Perhaps surprisingly, for all of the trust and prosperity that European integration and the single market have produced over many decades, these fears remain.

There is little question that a common currency requires an integrated banking market that delinks sovereigns from financial institutions. For as long as banks have national identities that signify special service to the domestic economy, any collective bank bail-out facility will reinforce Europe's national political divisions, which have proven so disruptive to economic recovery in the current crisis.