_ The document updates the report The Reform of the International Financial System published by FAES in 2009
_ “It is not possible to make any headway in finding a solution to the current economic crisis without significant progress in building an optimal currency area”
_ It suggests the imminent building of a Deposit Guarantee Fund
_ Creating a single supervisor and banking resolution authority for the eurozone are considered essential
_ It would begin with a “European coverage limited to €100,000 per banking institution and account holder”
_ One euro in a Spanish or German bank must be the same kind of asset: it should only be distinguished by the solvency of the financial institution
_ “It is vital to relaunch the Monetary Union with fiscal rules that are clear, precise, straightforward and workable, with no margin of political discretion”
FAES Foundation has launched on October 5, in Berlin the report ‘Rescuing the Euro’, urging to create a Banking Union. The new report updates the document ‘The Reform of the International Financial System’ already published by FAES in 2009. This Paper specifies the necessary points to create a European Deposit Guarantee Fund with a single banking supervisor, and details the necessary steps to start the European Banking Union. Likewise, it proposes a limited fiscal union that enables the ECB to act as a lender of last resort for the financial system.
The presentation has been done by the vice-chair of the European People’s Party Group in the European Parliament, Jaime Mayor Oreja; the FAES director for Economy and Public Institutions, Miguel Marín; and the author of the document, the economist Fernando Fernández. The event has taken place at the annual conference of the European Ideas Network, EIN, the network of think tanks and foundations linked to the European People’s Party.
OPTIMAL CURRENCY AREA *
In ‘Rescuing the Euro’, Fernando Fernández suggests to *push Europe’s political union forward and notes that it is “not possible to make any headway in finding a solution to the current economic crisis, which is essentially a crisis of confidence in the European single currency project, without significant progress in building an optimal currency area”, something which requires Europe “making inroads into Political Union”.
The author writes that “The private financial system has ceased to operate”, and points out that “in a Monetary Union with as many regulators as there are countries, not only does country risk not vanish nor necessarily lessen; instead it can even be amplified by the protective action of each sovereign regulator towards its own national banks”.
The report further states that only a European Deposit Guarantee Fund will enable a euro in a Spanish bank to be exactly the same kind of asset as one euro in a German bank, distinguished only by the quality and solvency of the financial institution and not the country’s solvency. Only thus will there be a clean and effective* European banking competition* to the client’s benefit.
EUROPEAN DEPOSIT GUARANTEE FUND
The document therefore proposes as a “pressing issue” the setting up of “a Deposit Guarantee Fund on a pan-European scale and with clear fiscal rules that allows the ECB to act as lender of last resort for the financial system”. The document states that “this is an alternative that inexorably leads to surrendering financial and fiscal sovereignty to as yet undefined European authorities and would mark the starting signal for a genuine Banking Union”.
For its inception, Fernández indicates that it should begin with a “European coverage limited to €100,000 per banking institution and account holder” in a system prefunded with a flat rate for all insured countries and funds. With regard to institutional issues, the document specifies that "it should be an institution that is legally and operationally independent from the European banking regulator, the restructuring authority and also the supervisor”.
The author also states in this text that “a sustainable banking union requires a single mechanism for banking regulation, supervision, and resolution”, to avoid “the policy of national champions in defence of one’s own banks; allowing evenly-matched and balanced competition; and guaranteeing the functioning of a common currency financial market”. This single mechanism would involve, according to the author, “a certain mutualisation of the banking debt”.
LIMITED FISCAL UNION
The report likewise states that in order to proceed with the baking union, “a limited fiscal union” needs to be established, for which it is “vital to relaunch the Monetary Union with fiscal rules that are clear, precise, straightforward and workable, with no margin of political discretion”. “If they are to be credible, the rules call for a decision mechanism with the least possible degree of political intervention”, which would imply “handing over the capacity for effective decision-making to a supranational authority for issues concerning deficits, debt and how government expenditure grows”. Failure to comply would “automatically involve outside intervention”.
Furthermore, Fernández writes that “a Fiscal Union does not imply tax harmonisation but simply avoiding and internalising the externalities which occur within the Union itself due to the legitimate use made by the various countries of their untransferred sovereignty”. Therefore, according to the author, the fiscal union requires “rules on fiscal performance, decision mechanisms in the event of not adhering to them, and an Administration to implement them”.
With regard to Spanish economy, the FAES report stresses that “the success of its adjustment process, appropriate correction of its imbalances, and getting it right in defining European strategies, will have a notable effect on the chances of survival of the common currency project”. And adds, “The Spanish economy will be better placed for whatever comes around if it sorts out its problems successfully and if it adopts a resolute policy of adjustment and competitiveness. […] Turning Spain into a competitive, dynamic and flexible economy is the best contribution we can make towards a sustainable euro”.
Moreover, the document notes that “Things have always gone well for Spain when it has opened up to Europe, particularly when Europe defined itself as an area open to the world rather than a fortress-Europe. Budgetary stability, monetary orthodoxy, structural reforms and privatisations are policies which Spain started to import from Europe in the eighties. Once again, they remain the policies best-suited to Spain”. Therefore, it concludes, “It is up to the current Spanish government to apply them with ambition and resolve. Yet it is also up to European leaders to define a common institutional framework for all Europeans”.
Read the FAES Paper ‘Rescuing the Euro’ in Spanish, English y German