Europe at a Crossroads: Which Path for the Banking Union?

Mr. Chairman, Dear colleagues and friends, It is a pleasure for me to accept your invitation and to have the opportunity to debate the following hot issue in the European agenda: the question of whether or not the structure of the Banking Union is consistent with the goals of the Economic and Monetary Union (EMU). The EMU is undergoing dramatic changes due to the recent financial crisis; in particular, the answer to the instability of the financial markets is reflected in the new framework of the Banking Union and the forthcoming Capital Markets Union. It is of utmost importance to assess whether this new step towards economic integration is coherent with the foundations of a renewed EMU. My analysis will focus specifically on the Banking Union, active since November 2014, but the analysis could apply, to a large extent, to the Capital Markets Union process as well. I will firstly recall the dimension of Economic and Monetary Union and the rationality behind the structure of the Banking Union; and secondly, the consistency between the Banking Union and the goals of the EMU are analyzed in the second section, which identifies some possible impasse and critical areas; lastly, I will discuss conclusions and provide recommendations for policy makers and supervisors. The Economic and Monetary Union and the “Dilemma of the Three Junctions” There is an evident unbalance between stability, growth and social cohesion in European policies. This “dilemma of the three junctions” is at the base of the empasse currently experienced by European Authorites and Members States. As for stability, sound budgetary policy of public finances is achieved by setting requirements (fiscal compact) fostering savings in public expenditure, mainly from structural reforms of the welfare state. This appears in contrast with the social dimension of Economic and Monetary Union (EMU): poverty reduction, financial inclusion, income distribution (social impact), and positive environmental impact, suffer from a dramatic reduction in welfare state expenditure. As for growth in GDP, the goal of fostering investments, in times of savings in public expenditure, means that output must be financed mainly by EU funds and the private sector, both of which are also called to meet social needs. The outlined situation stresses the role of banks, financial intermediaries and financial markets in financing real economy and the welfare state, and calls for new business models and financial architectures, mainly based on a public-private partnership. Bank regulation and governance of the EU banking market have become of paramount importance. The above raises the question of whether the prudential regulation and new governance of the Banking Union actually improve stability (European Fiscal Compact requirements), growth in GDP (investments) and social cohesion (job creation, financial inclusion, and wealth distribution).