Eurozone needs banking union for stability, says ECB

13 Jun 12
Eurozone countries need to take concerted action to end the turbulence affecting the single currency by moving towards a closed fiscal and banking union, the European Central Bank said yesterday.

By Nick Mann | 13 June 2012

Eurozone countries need to take concerted action to end the turbulence affecting the single currency by moving towards a closed fiscal and banking union, the European Central Bank said yesterday.

In its monthly Financial stability review, the Bank said the overall outlook for financial stability in the eurozone was ‘very challenging’. Improvements in early 2012 had been followed by renewed pressures since April that meant there was ‘no room for complacency’ from governments or banks in moving towards a robust monetary union.

‘There remains a clear need for a continued focus on tackling the root causes of the crisis, and a comprehensive response remains key to decisively ending a spiral of systemic risk augmentation,’ it said.

It added: ‘Developments in the last few weeks have continued to illustrate the persistent negative interplay of key risks, and underscore the need for concerted and comprehensive decisions of member states to put an end to the turbulence that has been affecting the euro area for over two years.’

Governments were urged to both ensure fiscal discipline and accelerate structural reforms for growth and employment. Action was also needed to provide lasting funding certainty for banks.

They should also eliminate political and economic uncertainty to provide a solid basic for markets to manage risk and to introduce measures to strengthen economic and fiscal surveillance. These measures, the Bank said, would provide ‘credible reassurance that the crisis that has engulfed the euro area over the last few years will never be permitted to recur’.

Eurozone countries should now ‘go beyond these areas’ and create a banking union. Doing so would strengthen euro area-wide supervision of the banking sector to improve the ‘smooth conduct’ of the single monetary policy, the ECB said.

It would also make it less likely that taxpayers would have to bail out banks and it would break the link between banks and countries, which the ECB said ‘significantly exacerbates’ the impact of any financial disturbance.

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