Friday, May 25, 2012

The EU countries' vulnerability to bank runs

Wolfgang Münchau explains in The only way to stop a eurozone bank run Financial Times 05/20/2012 how European Union law on capital transfers among EU countries make it difficult for a country to stop a bank run or get out of the euro without also getting out of the EU itself:

What makes bank runs so lethal in the eurozone is the legal framework. The most important rights conferred by the EU to its citizens are the four fundamental freedoms – of movement of labour, goods, services, and capital. Article 66 of the Treaty on the Functioning of the European Union says the freedom of capital movement can be suspended but only in relation to third countries. The article can be invoked to stop Greek outflows to Switzerland, but not to Germany, at least not legally. That is one of the reasons why a eurozone exit cannot be legally accomplished inside the EU.

The only policy that can credibly counter the threat of a self-reinforcing bank run in the eurozone would be a eurozone-wide deposit insurance and bank resolution regime – at eurozone level. In other words, you have to take the banks – all the banks – out of the control of their home country.
For Greece, it's all but certainly too late. And Münchau is careful to note that such a reform of EU banking regulation "would, of course, not solve all of the eurozone's problems."

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