LONDON: The European Union’s blueprint to close failing banks won’t be enough to break the pattern of eurozone states haemorrhaging funds by propping up weak lenders, a Reuters poll showed.
Hailed as “the final pillar” for a banking union by Germany, last month’s deal aims to prevent bank failures from dragging governments to the brink of bankruptcy, as happened in Ireland and Cyprus. It features a single resolution fund that banks will pay into over the next ten years, giving roughly ¤55bn. Until then, individual governments would be left holding the bill.
In a Reuters poll this week, 27 of 41 economists said this structure would not break the so-called “doom loop” between banks and states. “At least for the first years, the agreement doesn’t go far enough in terms of risk sharing,” said Kristian Toedtmann, economist at DekaBank in Frankfurt.
“If serious problems develop in the banking system, the sovereign will ultimately have to step in, probably with assistance from the European Stability Mechanism,” he added, referring to the emergency backstop fund for eurozone states.
Eurozone governments have already spent hundreds of billions of euros trying to stop the rot in the region’s financial system, and at a huge social cost.
With harsh austerity a direct result of the financial crisis, the euro zone has struggled to escape the spectre of recession over the last few years, and high unemployment has become endemic.
The banking union project aims to stop citizens taking the hit for the banking sector again.
By setting up a system to shutter troubled lenders, Europe would equip the ECB with the means of dealing with teetering banks.
Reuters
