Europe’s recent lamentable growth numbers bring home the cost of poor policy. But after years of confusion, distraction and errors, eurozone leaders are focusing on the right task, as finance ministers did in their meeting last week: to build a banking union for the euro.
Many of Europe’s banks have been left undercapitalised, their lending constrained by frozen funding markets and the debt overhangs on their balance sheets. By hanging the debts of banks around the necks of governments, the original policy exacerbated panic in sovereign debt markets. Thus a failure to fix the banks beat a path for the other big policy mistake. Instead of the fiscal co-ordination needed in monetary union, where financially solid states expand while stretched ones tighten, the eurozone was subjected to the strictures of austerity for all.
Since June, however, the eurozone has been moving towards banking union, albeit fitfully. At times it has gone into reverse. It has agreed on a single supervisory authority, though it remains to be seen how it will work (especially a compromise to keep small banks out of the net in normal times).