Podcast: "We can be smarter"
Nicolas Véron on the euro's unfinished business
Listen to the podcast on Apple or Spotify.
As Europe’s debt crisis peaked 12 years ago, policymakers reached a terrifying conclusion: their governments and financial systems had developed a “doom loop”.
National governments (“sovereigns”) had over-borrowed and their local banks had bought too much of that debt. Sovereign insolvency would wipe out the banks, and banks’ insolvency – as Ireland, Spain and Cyprus revealed more clearly than anyone else – could bankrupt the sovereign. In a desperate attempt to break the loop, euro-area governments agreed to create a banking union. Stage one - launched in 2014 - would shift responsibility for financial supervision to the European Central Bank and use jointly raised public finance to recapitalise vulnerable but solvent banks. In stage two, the union would allow for the resolution of insolvent financial institutions with pooled funds, reduce banks’ sovereign exposures, and replace national deposit insurance with a union-wide guarantee.
The June 2012 announcement – followed a month later by the ECB’s “whatever it takes” commitment – stabilised the system. But, as always, once the acute crisis was over, governments lost the motivation to progress from stage one to two. Now a decade old – a birthday celebrated by Nicolas Véron in Europe’s Banking Union At Ten: Unfinished Yet Transformative (Bruegel, 2024) – the union is no closer to cutting sovereign exposures or joint deposit insurance. And, as fiscal worries in France and Italy resurface, so does the doom loop.
“Here we are … with this unfinished business of both sovereign exposures and what I would call more generally the crisis-intervention framework because it's not only resolution, it includes deposit insurance,” Nicolas Véron tells me in a New Books Network interview. Deposit insurance “is an indispensable element, frankly, for a complete banking union and I would say even for a complete eurozone “When you think about it, deposit insurance is really about the definition of what money is and whether a euro in Germany is equivalent to a euro in Slovakia or Finland. As long as deposit insurance is not really unified, the eurozone itself is a halfway house. So this is pretty fundamental”.
The book and interview explore the 2008-2012 crisis that spawned the union, the critical off-the-books principals’ meeting at Paris-Charles de Gaulle airport where the deal was done, the importance and cost of “whatever it takes”, the post-2014 hiatus, and the prospects for completing the project. “I'm pretty confident it will happen one day,” he says. “The big question, which is kind of the conclusion of my book, is: Do we need a crisis for it to happen or can we anticipate? Can we be smarter than that? I think we can be smarter but, at this point, we haven't demonstrated it”.
For my Writers’ Writers tip sheet, he chose Central Banking before 1800: A Rehabilitation by Ulrich Bindseil (Oxford University Press, 2020) and 7500 euros: Pastiches politico-littéraires by David Spector (Wombat, 2022).