EU Banking Union: The Next Step for EU Integration

This blog post is the fifth in a series of posts that come from students of our Politics of the European Union undergraduate course. As part of the course, students were asked to write about an issue pertaining to European integration. The best blog posts have been selected to provide an opportunity to exceptional young scholars at UCD to contribute to the debate on the future of Europe, and to promote the insightful scholarship being undertaken at UCD to a wider public audience.

Fergus1On 3 March 2014, the President of the ECB Mario Draghi met the Economic and Monetary Affairs Committee of the European Parliament and told them of how failing European banks are still in need of a ‘strong and swift’ EU decision-making system. He argued that the obligation of supervising these banks should be that of the ECB in order to ensure consensus and swiftness of action (European Parliament press release, 2014). These comments serve to highlight the continuing debate as to what the next step in Eurozone integration should be, and how to ensure against the occurrence another banking crisis.

In December 2013, the Council of the European Union had called on the Greek Presidency to begin negotiations with the European Parliament with the goal of establishing the Single Resolution Mechanism (Council of the European Union press release, 2013). This device would allow the ECB to interact directly with failing banks in the Eurozone and would be seen as the next step in the development of a European Banking Union (Taylor, 2014). It has proven to be a contentious issue. Despite the need for reform, it is unlikely these changes will be popular with voters, with many wary of delegating more powers to a centralised EU institution (Hix and Høyland, 2011; 272). This article will argue for continuing the process of creating a European Banking Union as the next logical step in the process of EU integration.

Economic and Monetary Union (EMU) is an unfinished project. The notion of establishing an economic and monetary union was first brought up during negotiations on the Treaty of Rome (1956), but it was not until the Maastricht Treaty (1991) that the legal framework of the union was decided upon (Hix and Høyland, 2011; 249-250). It would be a further eight years before the EMU was officially launched, with the notes and coins of the Euro currency not entering circulation until 1 January 2002 (Hix and Høyland, 2011; 245). Today the Eurozone consists of 18 of the 28 EU member states, Latvia being the most recent to join in January 2014. This is evidence of the EU continuously, albeit slowly, developing in nature. This trend is set to continue.

The theory of Neo Functionalism, as conceived by Ernest Haas, is a useful, if not universally accepted, theory for understanding EU integration. It is especially helpful when looking to understand the Single Market and subsequent economic developments (Jensen, 2013; 69). The theory of neo functionalism is not concerned with ‘end goals’ but rather with the continuing process of integration itself (Jensen, 2013; 60). This makes it very useful when considering the Eurozone as there is no definite goal of integration to be reached in its development. The core concept of neo-functionalism is that of ‘spillover’. This refers to the process whereby working towards achieving a specific objective ‘leads to the formulation of new goals in order to assure the achievement of the original goal’. An example of spillover can be seen in the way in which the introduction of the single market led to a standardization of working regulations across Europe (Jensen, 2013; 62-63). This same theory can be used to explain why the introduction of the common currency requires fiscal coordination throughout the Eurozone.

There are practical as well as theoretical reasons for the implementation of a new Banking Union. The recent financial crisis, the effects of which are still visible around Europe, has highlighted the inadequacies of the Eurozone in its current form. Five Eurozone members required emergency bailout assistance, and some doubted the ability of the Eurozone to overcome the crisis. In a column for the Guardian newspaper (2012) the President of the European Commission, Jose Manuel Barroso, acknowledges the near disastrous nature of the crisis and puts forward the case for a Banking Union to rectify these problems. He writes that ‘the future of the single currency will determine that of European integration’ and says that the economic and monetary union is ‘unfinished’ in its current form. He continues by arguing that the only action that can tackle this head on is the creation of a ‘European banking-supervision authority’ which would allow for ‘common banking supervision’ of the Eurozone. There is empirical evidence to support this point as Hix and Høyland (2011) note that ‘the most independent banks produce the lowest inflation rates’.

Writing once again for the Guardian (2012) Barroso confronts concerns that such developments will lead to the creation of a European ‘superstate’ or a federal EU. He writes that he does not wish to see this happen but claims that ‘a stronger EU’, created through further integration, ‘means having more clout internationally’.  Borroso certainly makes a compelling argument in these two articles. One cannot deny that the financial crisis brought to light significant shortfalls in the current Eurozone structure and it is hard to disagree with the sentiment that only further integration can rectify this. Maintaining the status quo cannot be seen as an option considering how destructive the financial crisis has been, and could be again, to Europe. Such is the nature of the Eurozone that only through further integration can the system be improved. Deciding against integration invariably means accepting the inadequacies of the Eurozone in its current form and allowing the Euro Project to fail.

It is unclear what form the European Union will take in the next decade. It is a continually evolving and maturing entity. However, what can be said with certainty is that the EU is moving towards the creation of a Banking Union, and that considering the theory and recent history of EU integration, this is the logical course of action to take. European integration is a slow process, often painfully so, and the establishment of an institution as complex and significant will take time to design. It is a necessary process to take however, with the future of the euro at stake.

Fergus Carroll is a politics student at UCD.

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