Neither the governments nor the major banks in the euro zone are in favour of a banking union, the annual Dublin Economics Workshop, held in Limerick at the weekend, was told by a former government adviser.
Economist Dr Alan Ahearne, who was an adviser to the Department of Finance during the last Fianna Fáil-led government, said the banks don't want a banking union because they feel that governments protect their national banks. And governments don't want a banking union because their banks buy their bonds, tend to lend into their economies, and sometimes give low rates to politically popular domestic projects.
He was speaking after a paper from Karl Whelan of UCD on Resolving Europe's Banking Crisis, during which data was shown illustrating the low amount of credit being made available by banks across Europe to businesses and households.
Prof Whelan queried whether stress testing Europe's banks would be done in an objective way in a context where no one was sure what would happen if the results were too negative.
The International Monetary Fund's resident representative to Ireland for the past two years, Peter Breuer, said youth unemployment had "gone off the chart" in many countries and there was a rise in negative attitudes towards the European Union.
Yet political buy-in was needed if the reforms needed to deal with Europe’s problems, including the creation of a single resolution mechanism for banks, were to be processed. He pointed to the sharp fall in bilateral bank exposures between EU jurisdictions illustrating a reversal in the process of financial integration. Interest rates were highest in countries that were in the deepest difficulties, which was a major challenge to restarting growth.
The key challenge to dealing with the crisis in which Europe found itself was to restore the health of its banking system. If the banks were to be restored to health, then a stringent asset quality review of the banks was needed. The quality of the review would be very important. He said the ECB has done a lot to try to alleviate the crisis and may have to do more, “especially in relation to lending rates to SMEs”.
Economist Colm McCarthy said that designing a banking union when the issue of allocating the losses arising from the current crisis had yet to be dealt with, was at the heart of the problem.
