Vox
October 13, 2011
Europe, and the Eurozone especially, is years into an economic crisis. This column argues that if the euro is to survive, Eurozone citizens will have to accept the surrender of economic policy decision-making on an unprecedented scale.
Most of Europe has been engulfed by a systemic banking crisis for more than four years, even as policymakers and bankers themselves have strived to deny it. As pointed out by many columns on this site over the past few months (see a collection on the EZ Crisis Phase 2 page), things are even worse. The continuing fragility of the banking system is increasingly intertwined with the Eurozone’s sovereign debt crisis, as illustrated by successive patterns of contagion, from sovereigns to banks or conversely, from Greece to Ireland, Portugal, Spain, and more recently to Italy and France.
It is now plain that the crisis will not be resolved by a muddling-through approach that would allow a return to the status quo ante. If the euro is to survive, Eurozone citizens will have to accept pooling economic policy decision-making in unprecedented forms, a redefinition of the political pact that underlies European integration, and significant treaty changes.
An intense policy debate focuses on the options for Eurozone fiscal federalism, expansion of the role of the European Financial Stabilisation Facility (EFSF), euro bonds, or what ECB President Jean-Claude Trichet, in a landmark speech in Aachen in June, called a ministry of finance for the European Union (Trichet 2011). But the banking side of the crisis also calls for far-reaching innovation. For it to be resolved, Europeans must define a model of banking federalism that would complement the existing monetary federalism and the objective of fiscal federalism. All are needed as components of European financial and economic policy.
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