Banking union will transform Europe’s politics
Banking union was undertaken in the urgency to short-circuit a “doom loop” between banks and governments that fuelled the sovereign debt crisis. But the reform has far-reaching repercussions.
In time, more centralised authority and the requirement to bail in creditors will revolutionise European economic and political relations beyond imagination. If eurozone leaders had fully realised what they were signing up to, they would probably have lost their nerve.
Economically, bail-in creates de facto risk-sharing between countries. Making writedowns a regular practice when things go wrong puts in place a system of transfers from creditors to debtors. Over time, this is functionally equivalent to transfers from surplus to deficit countries, since the net savings of the former are typically lent to the latter through the banking system.