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The Euro Crisis and Its Aftermath$
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Jean Pisani-Ferry

Print publication date: 2014

Print ISBN-13: 9780199993338

Published to Oxford Scholarship Online: May 2014

DOI: 10.1093/acprof:oso/9780199993338.001.0001

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Sharing Financial Risk

Sharing Financial Risk

(p.144) Chapter 17 Sharing Financial Risk
The Euro Crisis and Its Aftermath

Jean Pisani-Ferry

Oxford University Press

Until mid-2012, Europe’s leaders did not consider fundamental changes to the euro policy system aside from creating crisis-management instruments. On June 29, 2012, they changed course and launched a major new integration project with the plan to create a banking union for the euro area. The root of the problem was that the euro system, as originally designed, was prone to financial instability. Banking systems remained national, and this feature combined with a strict no-monetary financing rule and with the prohibition of co-responsibility for public debt was the origin of a lethal feedback loop between banks and sovereigns. One solution to break the loop would have been for states to extend to one another public-debt guarantees, by for example creating a form of “Eurobonds”, but these options were opposed by Germany. Banking Union – the course of action eventually chosen in June 2012 – consists of assigning responsibility for bank supervision and resolution to the European level, instead of the national level. The endeavour is ambitious and has profound implications: it starts with common supervision, but cannot stop with it. The direction taken in June 2012, and its subsequent concretisation were significant enough to bring calm back to the markets. The difficult question, however, is not whether banking union will be completed but whether it will be able to address the euro area’s systemic weaknesses.

Keywords:   Europe, euro, banking union, banks, European Central Bank

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