Central bankers call for European banking union

by Felix von Geyer in Montreal


The governors of the central banks of France, Portugal and Canada called for a European banking union Monday to prevent the fragmentation of European Monetary Union in the wake of the EU’s financial crisis.

Speaking at the annual Conference of Montreal International Economic Forum of the Americas, Portugal’s central bank governor Carlos da Silva Costa stated that the EU now needed to go further in institutionalizing a framework. “A banking union is necessary to prevent fragmentation,” he said. Da Silva’s thinking was underlined by the governor of the Bank of Canada Mark Carney who told the conference that open financial systems are essential and would lessen the impact of future market failures.

Carney welcomed the EU’s attempts to recapitalize Spanish banks over the weekend as “progressive” and demonstrated the EU’s resolve to address its problems, he said, before adding that “a banking union is essential to monetary union.” French central bank governor Christian Noyer described the Euro as `hard-hit` due to the absence of mechanisms to support monetary union. “The banking system needs to adapt. It needs a leap to stronger financial integration,” said Noyer. Such mechanisms need to be “less reliant on national mechanisms such as different credit conditions,” he said, calling for a “fully federal banking system.”

While many steps are needed to bring about this transformation, Noyer called for the “political will to create this,” he said. Quoting the leading architect of European union, Jean Monnet, Noyer said: “Europe is the son of crisis and the responses it is able to bring to those crises,” he concluded. However, in discussing the future of the Euro and its bail-out system, Deutsche Bank Chief Economist Thomas Mayor noted that three-quarters of the financially troubled Greek population wished to remain in the Euro zone but rejected the Troika-led structural adjustments. For Greece to retain the Euro but reject the structural conditions of the International Monetary Fund-led assistance would mean Greece would have to write IOUs to its creditors which in turn would “become a parallel currency,” he said.

Striking the balance between fiscal discipline and economic growth is critical, the conference heard. Canadian Prime Minister Stephen Harper told the conference that he would take the message to next week’s G20 meeting to be hosted by Mexican President Felipe Calderon that “economic growth and fiscal discipline are not inseparable,” he said.

Portugal’s da Silva stated that sustainable growth required “striking a balance” on fiscal policy as there is a “trade-off between fiscal consolidation and growth prospects,” he said. However, striking the balance “is a matter of judgement… that requires consensus,” said da Silva. “The key word is credibility,” he said before calling for the institutionalization of a banking union.