Banking union, or Euro 2.0

It is not clear why the European central bankers, and German in particular, are spending so much for sponsoring the banking union if we do not start from a simple consideration.

In a financial system there is not only legal currency, the one emitted by the central bank and we use every day to live. There is another, equally important: the bank money.

The bank money, simplistically, can be defined as a payment technology: a tool that allows an economic entity to pay its debts to creditors. Like bank deposits and related instruments, such as ATMs, credit cards, and so on. Basically anything that is not cash.

The banks, when they issue bank money, issuing debt, just as central banks when they issue legal tender. The difference is that the debts of the banks meet the claims of someone (depositors, for example). While those of the central bank debts are based only on the credibility of the bank. And that’s it.

In common, the two currencies, they are moved by the fact that trust. As written by the Bank of Italy in its document, “the circulation of bank money is based on confidence that the community puts on its ability to act as a payment equal to the cash” .

Legal tender and bank money, in fact, coexist in everyday life.

But the eurozone has a special feature. While the legal currency was put in common with the creation of the euro, banking remained in the availability of national states. These have yielded sovereignty to allow the creation of the euro, as managed by the European Central Bank. They now have to surrender sovereignty to unify not only the legal currency, but also the bank.

So it can rise to the EUR 2.0.

As usual, it’s all a question of credibility.

The euro, fiat money, finds the root of its credibility in the dogma of the independence of the ECB, which not only answers none of its decisions but must also obey even the prohibition to finance public deficits. These loans, in fact, in the past have been considered as the main cause of loss of central bank credibility. That is the theory. In practice we are seeing massive funding of public deficits by the Fed and BoJ’s no such credibility is found to be decreased. But that’s another story.

One has to wonder, therefore, rests on what the credibility of the bank money, that European banks have issued at breakneck ending up being crushed by their debts .

The problem lies here: the credibility of the bank money rests exclusively on the states where these banks reside. Consequently, the credibility of bank money is directly related to the credibility of public funds, which at the time, are the first in having to incur any bailouts. In this way, the credibility of the bank money ends up being directly connected with the fiscal policy of the states. Which is the opposite of how it should be in the wonderful world imagined by the architects of the EU.

A banking crisis, in fact, is capable to destroy, as indeed it is almost done, the single currency. After you have worked so hard to escape the “danger” caused by the nation-states, the EU is likely to bring trough the window that is out the door.

There is another consideration to make. Just as independence has allowed the central bank to no longer finance the debts of the states, now EU want to achieve the same effect by regulating the banking business.

This is also part of the path to the euro 2.0. Domestic banks, in fact, to support the sovereign debt crisis after the explosion of the spreads have finished with fill itselfs of government bonds, replicating what they were doing before the central banks. The banking union will break once and for all the link between public debt and banks.

All this, of course, to the advantage of the credibility and the magnificent and progressive fate of European finance.

Could be simplified as follows: banking union full monetary union. Once set and pooled the rules on banks, the eurozone would become really a monetary union, legal and banking together.

If the responsibility for the creation of bank money remains to the states, on the contrary, the process of monetary unification remains incomplete. From this point of view, the eurozone crisis has been an extraordinary accelerator of a process by its nature very slow.

Unify money bank with the legal means, however, for states, other transfer sovereignty. The underlying philosophy, which I called Berliner consensus , is repeatedly emphasized by the Bundesbank, even recently.

He spoke, for example, Andreas Dombret, member of the board of the German central bank at a conference a few days ago, discussing the relationship between the debt crisis and the consequences for the real economy. The plot is always the same: the excesses of the banking have generated the crisis, so you need a better coordination of banking policies not only to prevent other crises, but also to have a real economy more healthy, competitive and productive.

The scheme has already shown few days before by another of his colleague of the Bundesbank : rules and responsibilities, based on independent authority, like the ECB on the side of supervision and a resolution authority on the side of the decision. And then private involvement in bank bail-in, starting from the shareholders to the depositors. See the case of Cyprus.

Finally, there is another aspect to consider. Subtracting the burden to states to recapitalize the banks, and placing it, as you would do for the fund ESM, we reach another important goal. The activation of the ESM, in fact, requires a significant transfer of fiscal sovereignty within the European authorities by the states. See the Spanish case.

And this is the ultimate consequence of banking union: common fiscal policy.

Once the money (legal and banking) will be unified, there remains only the latter piece to complete the operation EU: economic governance area finance.

But at that point we will talk all German.

  1. minsky

    Hi there,
    banks can’t issue any bank money. Only central banks can print money. Private banks can borrow this money as credit from the central banks or from the capital market and lend it to the private sector. Moreover, nation states can print money as well, in the form of credit for citizens. For example, Italy print 800 billions of pubblic expenditure every year. A lot of money. Printed by the State. So what’s the problem?

    Mi piace


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