principle, they involve two key risks to financial stability (and consequentially economic activity,
employment and ultimately political radicalism). The first, as evidenced most strongly in Greece
and now in Italy, is that downward adjustment in the banking and public finance sectors to comply
with BU and EMU reform initiatives pose grave risks to the economies and polities of fragile
member states. The second, as evidenced more broadly throughout the eurozone in particular, is
that both banking and EMU reforms imply significant economic decline throughout the southern tier
of the eurozone, which leads them to be chronically fragile. Proposals to increase resilience in the
face of this fragility have been channeled into alternative means of avoiding uncontrolled financial
collapse (innovations in cross-border lending and balanced budget commitments) that reinforce
rather than alleviate the financial stress that the southern tier experiences. A side-effect of this
development is that the Eastern European countries that have remained outside the eurozone core
of the EU are likely to remain outside indefinitely.
This paper reviews the institutional developments within Banking Union and EMU reform, the
economic and financial implications they produce, reviews how countries have fared, and the state
of intergovernmental negotiations at the EU level to adjust the institutional matrix. It uses the
evidence to conclude that resilience in Europe outside of the rich northwestern hub of countries
around Germany will continue to remain weak, as institutional design perpetuates and aggravates
weaknesses elsewhere.
