Editorial: Europe’s Delayed Banking Union

Last year, European officials laid out an important proposal for a banking union that would resolve failed institutions; provide strong, central supervision of banks; and give depositors a solid guarantee that their money was safe. If carried out fully, the plan could help restore health to the Continent's depressed economy.

But progress toward a banking union has been delayed by internal divisions within the European Union. In particular, Germany's stubborn insistence that a banking union must be preceded by changes in treaties threatens to put a full economic recovery off for several more years.

In weak European economies, like Spain, Italy and Greece, banks are increasingly unwilling or unable to lend to businesses and individuals. Many are sitting on piles of bad loans made during the bubble years that are unlikely to be repaid in full. These institutions should be shut down, merged or given more capital. But the governments in these countries, which themselves are struggling to meet European fiscal targets by raising taxes and cutting spending, are not in any position to rescue their banks.

Late last month, European finance ministers took a half-step toward a banking union by agreeing that shareholders and some creditors must accept losses before taxpayer funds could be used to prop up troubled banks. But the agreement, which still has to be approved by the European Parliament and will not go into effect till 2018, would not establish a central European authority to deal with failed institutions. Each national government would be responsible for dealing with its own troubled banks even though many nations do not have the ability or political will to address the problem. It would be far better if policy makers gave that authority to a Pan-European agency, which would be independent of political interference.

The European Commission, the executive arm of the European Union, is expected to publish a proposal for a continentwide bank-resolution authority in July. But its efforts have already been undermined by Angela Merkel, the German chancellor, who has said she would not support such an approach without changes in treaties that undergird the European Union. Those changes would require the assent of legislatures and, in some cases, referendums. Germany has also previously stated that each country, not Europe as a whole, should pay for the resolution of troubled banks.

European treaties provide enough leeway for some powers over banking to be delegated to a centralized authority. Officials could use those powers to create what amounts to a de facto banking union. At the same time, they can get to work drafting and enacting treaty amendments to provide a strong legal foundation for such a union for the future.

The European Central Bank has bought some time by aggressively buying assets from banks, but its intervention is unlikely to turn the economic tide. Unemployment in many European countries is tragically high. And it is difficult to imagine how these economies will ever create jobs without properly functioning financial systems.

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