On the rocks

For the past two and a half years, European Union politicians have been caught in a catch 22. They seem to realise that the only way to save the euro is a more integrated, federal Europe, yet they face such opposition from their counterparts at home and their citizens, who fear a loss of economic sovereignty, that they cannot take the steps needed to make that necessity a reality.

The result has been a series of actions that have delayed but not stopped the slow-motion car crash that is the euro crisis. The latest proposal could be a decent compromise that at least controls the brewing banking crisis – if not the debt crisis – and should stabilise the currency area, but it will face similar opposition to past plans.

The idea is a banking union - for the eurozone countries, at least - and it involves moving support and supervision of banks from the national to the EU level, giving an agency the authority and capacity to restructure or close failing banks and instituting a eurozone-wide deposit protection scheme, backed at first by rescue funds.

It has been advocated by Jose Manual Barroso, president of the European Commission, Mario Draghi, president of the European Central Bank, Herman van Rompuy, president of the European Council, and Jean-Claude Juncker, chairman of the Eurogroup of eurozone finance ministers. So just a few people who hopefully know what they are doing. Proponents say this will halt the slow but growing bank runs in Greece and Spain and restore confidence across the eurozone, without pushing true fiscal integration.

However, the Germans are, as usual, opposing any pooling of resources. German banks are insisting on keeping deposit protection schemes ring-fenced domestically, saying that it would mean strong banks (ie, them) supporting riskier rivals (ie, everyone else in their view). They also argue – and this may be the crux of the matter - that a joint EU scheme could allow banks in peripheral countries to compete more aggressively in Germany.

There are other obstacles beyond German opposition. The banking union would likely be for eurozone members, rather than the whole EU. The UK would never give control of supervision of its banks to a central EU authority – with its large and powerful financial services sector that would be a political impossibility. Yet, the most obvious choice to be the EU supervising institution – the European Banking Authority – is located in London. The next choice would be the European Central Bank, which can be empowered to supervise by a unanimous vote of the European Council. Even if that unanimous vote is won, there is still the issue of logistics – setting up the institutions, bringing in the experts and agreeing the rules needed.

So there are many reasons why a banking union will not happen. Yet necessity might still overcome those reasons. The short-term fixes being considered are steps towards a banking union. European officials are currently weighing up a bail-out of Spanish banks, with support contingent on increased external oversight (by the EU).

The concern is that, like most EU action, the banking union will come about slowly, forced by worsening conditions – rather than decisively, in a way that could truly restore confidence.