The crisis has clearly shown that in Europe a receding tide lowers all the boats, not just the ones which are in trouble. 1  B. Sørensen and O. Yosha (1996), “Channels of interstate risk sharing: United States (1963–1990)”, The Quarterly Journal of Economics, November, pp. 1081–1111. 2  Y. Demyanyk, C. Ostergaard and B. Sørensen (2008), “Risk sharing and portfolio allocation in EMU”, DG Ecfin Economic Papers 334. 4  BIS central bankers’ speeches  My second remark is that the banking union – whilst critical for the ins – is also desirable for the outs. The so-called financial trilemma.3 – in other words the impossible trinity of financial integration, financial stability, and national responsibility for crisis prevention and management – holds for the entire region, and not just for the euro area. For example, the Swedish and Danish banking system are not only large in proportion to your GDP, but they are also very closely integrated with the rest of Europe. Let me focus on the case of the Danish banking sector. Danish banks’ consolidated assets are almost four times Denmark’s GDP. The biggest banks have considerable cross-border activities. For these reasons, it would make perfect sense for Denmark to join a Banking Union that is composed not only of a single supervision mechanism, but also a single resolution mechanism with a resolution fund that can serve as an insurance scheme in relation to systemic banks. Whilst participating in the banking union therefore appears desirable, the terms of that participation should also be right.
Imagine that the state of California would have had to come up with the TARP money for Wells Fargo instead of the US Treasury. Imagine that the state of New York would have had to provide the guarantees to Citigroup. Think about how the markets, how would the rating agencies have treated these states? And how they would have treated these banks? The lesson for the euro area is clear: federal institutions can prevent local crises from becoming systemic. In Europe, we do not yet have these federal institutions that can act as shock absorbers. So far, responsibility for dealing with bank problems lies exclusively with the individual EU countries. The result is that – to quote an FT editorial – “national taxpayers subsidise banks implicitly in good times, explicitly in bad times, and suicidally in a sovereign debt crisis”. Indeed, the crisis in Ireland has shown that problems in domestic banks can overwhelm the fiscal capacity of national sovereigns. The causality can also be the other way around, as the case of Greece has shown, where fiscal problems have dragged down the banking system. These countries got caught in a vicious fiscal-financial feedback loop, which in the end also drags down the economy, breaks up the internal market, and impairs our monetary policy conduct. Removing this vicious feedback loop is what Banking Union is all about. Creating a banking union will be good for the euro, good for the internal market, and good for the recovery.