Banking union and the financial architecture of the Eurozone: A retrospective

Xavier Vives

Professor of economics and finance at IESE Business School; Editor of the Journal of the European Economic Association; member of the EU’s Economic Advisory Group on Competition Policy; CEPR Research Fellow

Xavier Vives, 20 August 2012, voxeu

Does Europe need a banking union? This column argues that banking union is necessary but not sufficient for monetary union to survive. To cope with sovereign risk more political and fiscal integration is needed.

The Eurozone crisis has brutally exposed the inadequacy of institutional financial arrangements in the Eurozone. Modalities of banking union are being discussed now and the late June 2012 Eurozone summit agreed to give the ECB supervisory powers and, once this common supervisor is in place, it will allow direct capital injections into banks using the European Stability Mechanism. The European Commission will release a more concrete proposal on 11 September.

Other necessary elements of a banking union are a common Resolution Agency (RA) of troubled banks and a common Deposit Insurance Fund (DIF). Indeed, the central bank is the liquidity authority but it cannot be at the same time the solvency authority since bank restructuring may have fiscal consequences. The fact that a monetary union needed common stability and regulatory facilities is not news. This was pointed out, for example, by Folkerts-Landau and Garber (1994) as well as in an early CEPR report (Chiappori et al. 1991), and several authors, academic networks, and think tanks have insisted overtime on the issue. Twenty years ago I proposed the following architecture:

Reinventing Spain’s economy

Date: 11-07-2012
Source: Fortune

The nation has a big productivity problem compared with its trading partners.

FORTUNE — As Europe’s leaders attend one emergency meeting after another, the political high drama shouldn’t make us lose sight of the fact that if the debt crisis is to be solved, Southern European companies need to change how they compete. Nowhere is that more evident than in Spain, whose elites fret over interest rates while protesters in the streets call for closing the borders and a return to barter.

Almost no one there is talking about how to make the real economy more productive. According to our research with IESE Business School colleague Bruno Cassiman, Spanish labor productivity (real output per worker) went up by only 15% between 1990 and 2010, vs. 25% in Northern Europe. Meanwhile Spanish costs per worker went up by 120%, vs. 60% in Northern Europe. That means labor costs per unit produced in Spain rose three times faster than in Northern Europe – the region that includes its two largest trading partners, France and Germany. Italy and Greece have fallen behind the productivity curve as well.

Irish Bail-Out a Mistake, Says IER President

Prof. Hans-Werner Sinn Speaks to IESE Alumni
December 2, 2010

“My country (Germany) is very nervous about decisions taken over the rescue operation in Ireland,” said Prof. Hans-Werner Sinn, President of the Ifo Institute for Economic Research and professor at the University of Munich, during an IESE Continuous Education Session this week in Barcelona. “In the EU as a whole, the rules for budget deficit and sanctions were not respected prior to the crisis and debt constraints were not taken seriously or respected accordingly,” he said. 
 
IESE Prof. Xavier Vives, who was moderating the session, introduced guest speaker Prof. Sinn to the audience of 120 IESE alumni as: “a man of conviction who says exactly what he thinks, and despite being one of the world´s brightest economists, he does it in a way that is understandable and accessible.”

In his presentation, Prof. Sinn lived up to expectations by providing an in-depth and candid summary of the Euro crisis, the growth in EU countries over the last 10 years and where the euro stands today in the wake of recent “rescue operations” of Greece and Ireland. 
 
Comparing the Irish economy to that of Germany, he claimed that the Irish bail-out had been a mistake for several reasons. “Firstly, it was not necessary - Ireland´s GDP per capita is 15 percent greater than Germany´s. [...] The message that this rescue operation sent out destabilized markets across Europe.”