German economist Walter Eucken, who was another founding father of Germany’s social market economy, once said very aptly: “Those who reap the benefits must also bear the costs.” If banks assume they are too big to fail, they will be tempted to make the most of this implicit insurance and take on excessive risks, at the expense of society at large.
This is exactly what happened before the financial crisis. This kind of implicit insurance is not altogether unlike the framework of the European Monetary Union, where a single monetary policy exists alongside 19 largely autonomous economic and fiscal policies. I have already mentioned this special feature of our monetary union. As the crisis taught us, this set-up potentially exposes the EMU to vulnerability.