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).