The European Union’s half-baked banking union could be made to work – even though it wasn’t strictly needed to solve the euro zone’s problems and what has been agreed isn’t what the designers wanted.
The original advocates of banking union saw it as a way to prevent the euro collapsing during the dark days of early 2012. The idea was that a well-funded, euro-wide deposit insurance scheme would stop savers panicking. Meanwhile, if banks got into trouble, a strong euro-wide safety net would be able to bail them out.
During the crisis, savers and investors lost faith in the ability of weak governments to rescue their banks. That’s why banking union enthusiasts wanted euro-wide support systems.
In the end, what has emerged from the European policy factory is completely different. Germany latched onto a part of banking union that hadn’t previously got much attention, centralised supervision of banks, and nixed the idea of common deposit insurance. It didn’t want to be on the hook for bailing out other countries’ banks. Berlin also diluted the plan for a euro-wide safety net for bust banks – though the European Parliament is still trying to beef it up.
Despite all this, banking union doesn’t have to be a disaster. To see this, it is important to understand why the euro zone doesn’t actually need one.