The Great Debate UK
By Peter Thal Larsen and Neil Unmack
The authors are Reuters Breakingviews columnists. The opinions expressed are their own.
LONDON -- Forcing banks to bail out countries may have the ring of poetic justice. But Europe's idea of using a bank levy to capitalise a sovereign crisis fund is circular -- and dangerous.
Brussels has floated the notion of a one-off 50 billion euro tax on lenders to fund the so-called European Stability Mechanism (ESM), the new sovereign bailout facility due to take shape in 2013. It is just one among several ideas and doesn't appear to be being pushed hard. That's just as well -- whacking banks so that governments can continue to prop them up makes little sense. Worse still, such a scheme could reinforce the moral hazard the European Union wants to end.
The plan is misguided in at least three ways. First, it is circular. One of the main causes of the euro zone's peripheral crisis is that governments have felt compelled to stand behind their banks. Ireland's decision to support the liabilities of its banking system overwhelmed the public finances, and has undermined investors' confidence in Spain, Portugal and Belgium. A blanket levy on bank assets would make weak lenders more likely to seek state support.
Michel Barnier wants Europe to be better prepared for the next financial crisis. But the EU's financial market chief's plan for bank taxes seems to miss the point. Timothy Geithner's push for EU-wide stress tests raises questions of its own. But at least the U.S. Treasury Secretary has identified the core problem facing Europe's financial sector.
The current euro zone crisis has its roots in sovereign debt. But concerns about banks' exposure to risky sovereign debt have led to strain in the European inter-bank funding markets. There are also signs that U.S. money-market funds, which hold more than $500 billion of euro zone financial assets, are drawing back.