Mervyn King’s now almost legendary quip about the global financial crisis—that global banks are ‘international in life, but national in death’—applies with even greater force to the Eurozone crisis. And the consequences are increasingly devastating for European Monetary Union (EMU), as the unfolding drama in Cyprus well demonstrates.
In each stage of the Eurozone crisis—Cyprus simply being the most recent—we have been reminded that Europe’s banks, while purportedly ‘European’ in life (and allowed to grow, regardless of location, to an apparently ‘European’ scale), are very much national in their agonistic struggles to survive, ultimately dependent on national resources (or, in the case of Cyprus, also their depositors themselves). When viewed relative to national resources—that is, access to capital to resolve/recapitalize or even just to insure deposits—many Eurozone banks (not just those in Cyprus) are potentially bloated and dangerous monstrosities, posing huge systemic risks to the EMU as currently constituted. Bailouts coming from the likes of the EFSF or ESM—channeled as they are through national governments, subject to strict conditionality—do not change this conclusion. In fact, by ending up on national balance sheets and thus massively expanding national debts, these ‘bailouts’ only exacerbate the problem.
European leaders stated last June that they wanted to break the ‘the vicious circle between banks and sovereigns’. Ever since, however, the core countries have done seemingly everything they could to perpetuate the ‘sovereign-bank link’. Their actions have ensured that the entire cost of the EMU’s flawed design is born by the countries in the periphery, via austerity, the expansion of national debt, and now potentially the destruction of peripheral banking through depositor bail-ins and capital controls. There has, in other words, been no recognition of the fault that all Eurozone countries share in the flawed design of the EMU, or of the concomitant obligation to pool resources to solve the devastating problem of ‘legacy costs’. Therein—as the innumerable advocates of a genuine European banking union have pointed out—lies the true heart of the Eurozone crisis. Europe will apparently get some kind of single regulatory supervisor for at least part of its banking sector. But what it really needs, as so many recognize, is a common resolution mechanism and deposit guarantee scheme backed by the full fiscal capacity of the Eurozone as a whole (i.e., unshackled from the limitations of any single member state).
The situation in the EMU today reflects the perversely ‘partial’ character of banking integration in the Eurozone. I say ‘partial’ because Eurozone banks have apparently been well ‘Europeanized’ in terms of deposits and lending (very much consistent with the single market aspiration) but apparently not much else that is necessary to make such a single banking market a durable functioning reality. Despite the conveniently exculpatory critiques from the likes of Angela Merkel that the problem was the ‘Cyprus business model’, that model is arguably different only in magnitude but not in kind from what prevails in many other member states. As Gavyn Davies nicely put it in the FT, Cyprus is simply a ‘microcosm of the entire eurozone crisis, if a microcosm on steroids’: ‘an over-leveraged banking system, with insufficient capital and reliance on foreign funding,” all of which “is familiar territory in the Eurozone’.
What is the policy response? Beyond the single-supervisory mechanism and more fiscal surveillance of national budgets, Cyprus adds depositor bail-ins and capital controls (the latter of which could remain in place for a very long time, if history is any guide). A template for the future, one might fairly ask? Perhaps. But after making noises in that direction, the Dutch head of the Eurogroup, Jeroen Dijsselbloem, issued a statement denying that that was the case.
But in some sense, the denial is beside the point. The policy response in this crisis has been remarkably consistent—enforced national austerity in the periphery—even if Cyprus now adds depositor bail-ins and capital controls to the mix, perhaps for that country alone (which remains to be seen). But the key point is this: the Eurozone favors national austerity and perhaps now bail-ins and capital controls because they make no redistributive demands on ‘Europe’ as a collectivity; all essential costs—political and economic—are borne internally, by the individual states. The Eurozone thus avoids creating a genuine banking union, with the requisite Europeanized resolution and deposit guarantee schemes, which would of course entail shared financial burden for ‘legacy costs’. This is something the core countries have emphatically rejected.
The important question is to ask why. Why is it that Europe is unable to provide the necessary fiscal back up—the necessary solidarity—to allow the EMU to function without lapsing into constant crisis? To answer that question we must turn to the ‘perennial EU-dork topic’—the no-demos problem—which is proving to have ‘real bite’ in this crisis. A demos exists where there is a historically constructed sense of communal solidarity within a political grouping, in which it is legitimate for the majority to rule over the minority without that rule being regarded as ‘foreign’ domination. Within a demos-based polity it is ‘we’ who are governing ‘ourselves’ rather than being governed by ‘others’. And when it comes to taxation, borrowing, and spending, the existence of a demos is crucial to formulating policies on a scale with real macro-economic significance (not the measly 1% of European GDP that is the current EU budget). Within a demos-based polity, these fiscal actions involve moving money ‘among ourselves’. But in a polity not based on a demos (alas, the EU), those actions are often perceived as giving money away to ‘others’. The problem with the EMU is that it ‘presupposed a degree of centralized political power and legitimacy—most importantly relating to shared taxing and borrowing authority…—that the EU, or rather the Eurozone countries collectively, simply lack’.
Hence the reliance on national austerity (and now, apparently, depositor bail-ins) as the central policy instruments in this crisis—anything to avoid genuine transfer payments from ‘core’ to ‘periphery’ which might necessitate creating a real European fiscal capacity. Because of the lack of a robust European demos (not the marginal, pale version some see emerging), the Eurozone lacks both the fiscal and legitimacy resources needed to undertake the actions that could make the EMU a durable, working reality rather than the crisis-prone entity it has become. As I have written elsewhere,
European elites cannot simply wave the political-cultural magic wand and create the necessary sense of democratic and constitutional self-consciousness across national borders that constructing such solidarity … would demand. To do so without the requisite demos-legitimacy … would be the institutional equivalent of pouring good money after bad. At this point in Europe’s history, it cannot get from here to there ….
The policy response in the Eurozone crisis—the reliance on national austerity and supranational surveillance of national fiscal discipline (perhaps now combined with depositor bail-ins), but the lack of a genuine banking union with shared resolution and deposit guarantee schemes—demonstrates that the creation of the EMU stepped beyond the limits of what European integration could legitimately sustain. The creation of the EMU necessarily presupposed the existence of transfer mechanisms that, given the lack of solidarity within a coherent European ‘demos’, are apparently beyond the reach of today’s Europe. From this perspective, then, ‘the Cyprus debacle’, as one Greek economist recently put it, is simply ‘the homage that denial of the systematic nature of the euro crisis pays to a systemic crisis’. And at the heart of that systemic crisis remains the ‘no-demos problem’.