France and the Netherlands Strike Back

A key characteristic of the European crisis has been the strong correlation between banking stress and sovereign distress. Time and again, banks’ woes have affected governments’ borrowing costs, and concerns over governments’ solvency have affected banks’ balance sheets.

This major potential threat to financial stability has been alleviated, but not eliminated, by the ECB’s large-scale provision of liquidity. The recent re-emergence of concerns about Spain has shown that the problem has not gone away.

Systemic reforms to resolve the problem all involve significant further integration: joint issuance of government bonds that play the role of safe asset in banks’ portfolios, a banking union with a common regime for deposit insurance, supervision, and crisis resolution – or both. Either one involves risk-sharing among eurozone members.

In France, the Netherlands, and elsewhere, many citizens view Europe as a threat to their way of life. Telling them that the euro is an unfinished construct that requires even more commitment is a hard call for politicians. The question for the coming months is whether European leaders will have enough political capital to embark on further reforms and make the case for them to angry publics. If not, it is to be feared that they will agree only on platitudes and hope for the best.

Jean Pisani-Ferry is Director of Bruegel, an international economics think tank, Professor of Economics at Université Paris-Dauphine, and a member of the French Prime Minister’s Council of Economic Analysis.

Copyright: Project Syndicate, 2012.www.project-syndicate.org

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