Letter published in the Financial Times 16.05.2013 - page 10
In the EU when one wants to kill an idea without appearing to do so one says that it is very good but its implementation requires a treaty change. That is what Wolfgang Schäuble, the German finance minister, did in his article “Banking union must be built on firm foundations” (Comment, May 13)
Of course a banking union needs to be built on firm foundations, but equating this to a treaty change is a non sequitur. The EU has one institution that has been granted full autonomy and can act independently of national parliaments to execute its policy to keep inflation in the eurozone close to but below 2 per cent. For the European Central Bank to do this it needs an efficient monetary transmission mechanism. If this mechanism is broken and needs a banking union and an effective resolution authority to clean up insolvent banks and recapitalise them, then this is already within the terms of reference of the ECB.
It is shameful that Europe had to involve the International Monetary Fund to sort out its fiscal problems. The European Stability Mechanism can perform this function by it being rendered a division of the ECB operating independently of national parliaments to clean up insolvent banks and to recapitalise such cleansed banks through monetisation without reliance on national governments.
What the US did with fiscal policy through the troubled asset relief programme, the EU can do through monetary policy through the ESM/ECB. All this can be reversed with a profit as the US experience has shown, and it is indispensable if the EU is to emerge quickly from a recession now in its fifth year in many countries. Without sorting out insolvent banks and bringing them back to health through monetised recapitalisation, the recession will drag on relentlessly.