The vicious loop between sovereign and bank debt threatens the integrity of the euro zone. This article examines why the banking union is a prerequisite to break this loop and concludes that the current design is clearly insuffi cient to achieve this goal. In particular, the transitional phase poses serious risks for the euro zone as fi nancial markets remain fragmented and the crisis is far from being resolved.
The article discusses the components of a solid banking union, what we call a banking union made of concrete. Current plans by the euro area envisage a union that seeks to limit the use of taxpayer funds by extending the principle of bail-in. It is a banking union that runs the risk of being insuffi cient to face a systemic crisis.
This banking union, albeit limited, is diffi cult to implement in the short term given the current legal framework of the economic and monetary union. As a result, the union designed for the transitional period, which can be lengthy, will lack key elements such as a pan-European backstop that operates as a lender of last resort for sovereigns. Therefore, it is far from being a banking union made of concrete. This can be a fl imsy construction, not even made of wood but of straw. The risk is that it may be unable to withstand the challenges of the current crisis.