The difficulties that the eurozone has been facing since 2010 have made it quite clear that the eurozone suffers from a structural weakness caused by the interdependence of the banking and sovereign debt crises. In order to re-establish financial stability in the eurozone and to prevent any further crises, the EMU countries must find solutions to each of these two crises and break the link between them. To this end, member states must adopt a roadmap leading to the implementation of a fiscal and banking union within the eurozone.
But are member states ready to accept greater solidarity within the group, which would translate into a sharing of the risk linked to public indebtment – through the issuance of common bonds – and of the risk linked to the banking industry – through the creation of a European fund for the resolution of banking crises?
This Policy Brief by Sofia Fernades sets out to debate the terms on which these steps forward can be made in the short and medium-to-long term. She first deals with the issues involved in debt mutualisation by presenting the proposal for the establishment of a “European Debt Redemption Fund” (ERF) as a compromise between the solidarity required to negotiate a way out of the crisis, and a commitment to fiscal discipline. She then considers the European banking system’s weaknesses, which should be addressed by a banking union.