The executive branch of the European Union — the European Commission (EC) — is set to release a report today that recommends allowing the funds in the European Stability Mechanism (ESM) to be used directly to increase capital in the EU’s banks. The Wall Street Journal cites a preliminary release:
To further stop expensive bank bailouts from pulling down governments’ own finances, allowing the euro zone’s new rescue fund [the ESM]] to directly boost the capital of banks “might be envisaged,” the European Commission said.
Envisaging such a “banking union” may be easy for Greece, Spain, and Italy, but it will not be so straightforward in Germany and perhaps some other Northern European nations. Allowing the ESM to recapitalize failing banks means fiscal union, and Germany has steadfastly refused even to discuss such a solution to the eurozone’s banking crisis.
The EC proposal is cast as something short of full fiscal union, but, in fact, it’s the first step down a slippery slope to fiscal union. Essentially the EC is forcing the eurozone to choose between austerity and stimulus, between Germany and Greece, and between national sovereignty and a euro-union.