The Eurozone's Forgotten Financial Union

There are two narratives to explain the economic and financial crisis that befell Europe. One focuses on the single currency. European politicians gambled and lost in the late 1990s and early 2000s when they created an economic and monetary union out of diverse countries at different stages of development. The single currency managed to survive but only at the cost of relentless austerity and massive unemployment. The other narrative focuses on the single market. When Europe's political leaders pushed for capital market integration and the liberalization of cross-border banking in the late 1980s and early 1990s, they failed to build common institutions to ensure financial stability. Instead they held onto national institutions for regulation, supervision, resolution and insurance that were too small to safeguard the banks and insurance firms that emerged in Europe's integrated financial space. These narratives are not mutually exclusive. Europe's leaders can be faulted on both counts. Nevertheless, criticism of the single currency tends to garner more attention. The purpose of this chapter is to explain why the failure to construct common institutions to safeguard European financial markets is a mistake. My goal is not to argue with the claim that the monetary integration contributed to Europe's problems. Rather it is to show how the absence of any financial union was sufficient to bring some sort of crisis about. If Europe's policymakers refuse to rectify the situation, they will have to relive the experience.