Level of financial market integration is also a choice (August 2012)

Rethinking Bretton Woods | Thu, Aug 9, 2012

In a letter appeared on the Financial Times (August 5 2012 edition), Aldo Caliari seeks to introduce some nuances to the claim that a banking union in Europe will socialize losses from financial crises.

(Reproduced from the Financial Times)

Level of financial market integration is also a choice

From Mr Aldo Caliari.

Sir, Otmar Issing (“Europe’s political union is an idea worthy of satire”, July 30) reminds us that a monetary union can survive without a political union. He brings a welcome dose of nuance at a time when policy makers’ choices seem temptingly framed in all-or-nothing, Manichean ways. But he himself seems guilty of the same sin when he quickly dismisses “banking union”.
Indeed, it is not the case that a banking union implies the socialisation of losses. In a situation of integrated financial markets – and Mr Issing espouses the belief that these should go hand-in-hand with a monetary union – elements such as a resolution scheme prove absolutely essential to avoiding the socialisation of losses by allowing orderly and efficient resolution of failing companies without wasting public resources.

Should one not accept that, there is another nuance to introduce: a monetary union can work with less integrated financial markets and, in the absence of eurozone-wide resolution schemes, might actually need to do so to avoid socialisation of losses. The European Commission briefly explored such an alternative in 2009: requiring separately capitalised entities in each country and thus making the orderly resolution of failing banks achievable on the basis of only national resolution schemes. This option did not fly then, and probably would not fly now, but we should not forget that the degree of financial market integration is also a choice.

Aldo Caliari, Director, Rethinking Bretton Woods Project, Center of Concern, Washington, DC, US