The G8 produced little heat or light on the state of the world economy but if there was one clarion call it was for the euro zone to get on with forming a banking union – the last major initiative needed to draw a line under the euro zone debt crisis.
With the European Central Bank effectively underwriting the bloc’s governments with its bond-buying pledge, a cross-border mechanism to recapitalise or wind up failing banks would do the same for the financial sector.
The trouble is, not unreasonably, Berlin does not want to fall liable for the failure of a bank in a weaker country. Instead, it is pressing for a “resolution board” involving national authorities to take decisions on winding up failed banks, which sounds like the onus would remain on governments to sort out their own banks rather than pooling risk which would convince investors that a proper backstop was in place.
In other words, the “doom loop” of weak banks and sovereigns weighing on each other would be unbroken.
U.S. President Barack Obama, whose administration has been urging progress on this front, is in Berlin today for a lot of ceremony and some talks with Angela Merkel.