The consequences of Europe’s debt crisis are all too present throughout much of the European Union, as distressed economies attempt to stabilize and grow at the same time. Notwithstanding the important decisions taken over the last couple of years, the reality is that we need to do more to tackle the challenges facing the eurozone.
Reform and consolidation measures are being implemented across the EU. Joint financial backstops have been put in place. And the European Central Bank has consistently shown that it will stand by the euro. Yet experts and partners often underestimate our determination.
All of the steps taken so far have resulted in more European integration, not less. It is true that sometimes decision-making in our democratic system takes time. But do not misjudge us: the negotiations are about the arrangements, not about the final outcome. There is sufficient political will in the EU to do whatever is necessary to protect the euro, because the future of the single currency will determine that of European integration.
The additional measures that Europe needs must be firmly rooted in a commitment to deeper integration. High levels of sovereign debt, together with the behavior of parts of the financial sector, have amplified the crisis in the eurozone and raised important issues of confidence that now require a systemic answer.
That is why we must complete the unfinished business of economic and monetary union – and why the European Commission has long argued for the creation of a banking union as an indispensable step toward that goal. The Commission’s upcoming proposals are part of a broader package leading to economic, fiscal, and political union that will redefine the boundaries of European integration.
The crisis has starkly revealed the insufficiencies of existing banking supervision. We must go beyond cooperation and establish an EU-wide supervisory authority, particularly in the eurozone. The link between sovereign debt and bank debt has to be broken once and for all. We must end the vicious circle whereby the use of taxpayers’ funds – more than €4.5 trillion ($5.7 trillion) so far – to rescue banks weakens governments’ budgets, while increasingly risk-averse banks stop lending to businesses that need funds, undermining the economy further.
Europe can stop this negative dynamic now with bold action. A single rulebook for financial services is being put in place for the single market. Building on this, a single European banking-supervision authority would open the way to direct recapitalization of banks through the European Stability Mechanism, as well as to common deposit insurance and a single resolution framework.
On September 12, the Commission will present its proposals for a Single Banking Supervisory Mechanism based on three key principles:
Single supervision: Within the eurozone, coordination between national supervisory bodies is no longer enough. Risks that emerge in one country can affect the entire currency area. Common banking supervision is needed for strengthening confidence among countries using common financial backstops.
Credibility: The eurozone’s new banking-supervision mechanism will have the ECB at its heart. The choice of tasks to be entrusted to the ECB will ensure rigorous, high-quality, and equal prudential supervision of eurozone banks, thereby contributing decisively to maintaining confidence between the banks – and thus increasing financial stability throughout the eurozone. Close cooperation with national supervisors will be built into the framework.
The ECB’s supervisory role will be fully separated from its monetary-policy responsibilities. In parallel, the European Banking Authority will continue to perform its existing tasks, namely developing the single rulebook for the entire single market and ensuring convergent supervisory practice throughout the EU.
Broad coverage: All banks in the eurozone will be covered by the new European supervisory system. And we will need to bridge the gap between eurozone members and EU members that remain outside the monetary union, some of which may want to participate in the new supervisory mechanisms.
The road that we have decided to follow will allow for swift action. The Single Banking Supervisory Mechanism does not require a treaty change and should be in place by January 2013.
Common and more integrated supervision is the first step towards a banking union. , the Commission will build on our current proposals for deposit-guarantee schemes and bank resolution mechanisms to move toward a single resolution fund and a single resolution authority. Once these proposals are implemented, the banking union will be complete.
Establishing a banking union by 2013 will not give Europe a magic wand with which to wave away the economic crisis overnight; but it is a major and crucial step to restoring the confidence of Europe’s citizens, international partners, and investors. It will ensure financial stability, increase transparency, make the banking sector accountable, and protect taxpayers’ money.
Moreover, it is the start of something much bigger. Once again, I would like to stress that the eurozone is drawing lessons from the past and defining a way forward, not backwards, in terms of integration. That is good news not only for the euro, but also for the global economy.
José Manuel Barroso is President of the European Commission.
Copyright: Project Syndicate, 2012.