Three Ways to Save the Eurozone

Since the summer, the continuing installments of the Greek crisis have concealed a worrying process of fragmentation in the eurozone. The decision to reform the surveillance of governments and banks, and to boost the European Financial Stability Facility, is a welcome response, but the key issue is how to construct a more robust monetary union.

BRUSSELS – Since the summer, the continuing installments of the Greek crisis have concealed a worrying process of fragmentation in the eurozone. Indeed, there are several grim indicators of this development.

First, the spread between banks’ borrowing rate and the zero-risk rate has been climbing since July. Financial institutions with liquidity increasingly prefer to deposit their cash with the European Central Bank, which has had to resume its lending to banks. The same thing occurred in the 2007-2008 crisis, though the shift is less acute this time, and is confined to the eurozone. In London and New York, the interbank market is still working; nevertheless, there is reason for concern.

Second, cross-border banks are charging higher interest rates to firms in southern Europe than they are to comparable firms in northern Europe, which is worsening the situation for crisis-hit economies. This fragments Europe’s supposedly unified market. And, instead of combating this trend, northern European regulators are amplifying it by limiting financial institutions’ exposure to southern European banks.

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