Eurozone’s Proposes Grand Bailout: Regional Banking Union

So the rally incited by the Eurozone yesterday may have been triggered by reports of a proposed region wide banking union.

From the CNN Money

The European Union unveiled a plan Wednesday to create a coordinated banking union rather than leaving troubled nations to deal with their own banking crisis.

But the plans for more a unified EU bank regulator and bailout fund won't come in time to deal with the crisis sweeping Europe right now, including the beleaguered Spanish banking system which has become the epicenter of the European sovereign debt crisis.

The EU proposal would include a single deposit guarantee organization covering all banks in the union, something similar to the FDIC that covers U.S. bank deposits.

There would also be a common authority and a common fund that would deal with bailouts needed for the cross-border banks that are major players in the European banking system.

G7 keeping close tabs on Euro crisis

In addition, there would be a single EU supervisor with ultimate decision-making powers for the major banks, and a common set of banking rules.

"Today's proposal is an essential step towards a banking union in the EU and will make the banking sector more responsible," said European Commission President Jose Manuel Barroso in a statement. "This will contribute to stability and confidence in the EU in the future, as we work to strengthen and further integrate our interdependent economies."

The amount of the common bank rescue fund was not disclosed.

Many substantially important questions that begs to be answered:

Guarantees based on what and paid for by whom? Mostly the Germans? And since resources are limited or scarce, up to what extent are the Germans and other productive EU nations be willing to redistribute their resources to the unproductive and capital consuming economies? How will this affect EU regional politics particularly the relationship between rescuers and the rescued? How will this affect domestic politics particularly of the rescuing nations?

The idea of ‘risk free’ from government guarantees has proven to be a mirage and a regional banking union will be no different.

And as previously noted, banking union based on deposit insurance will likely mean the endgame for the euro.

The only thing this does is to centralize the EU banking system which even magnifies systemic fragility. What really would emanate from this coordinated plan would be massive inflationism. It’s still a plan, though. But markets appear to be reading through the plan as something imminent. [As a side note, everything has been so fluid, such that I can’t find confidence on this until after an official response has been made.]

Bailout schemes have short term effects with nasty longer term consequences. As proof, the Euro debt crisis has been a continuing crisis since 2008 and seems self-perpetuating amidst the series of past failed bailouts.

Sadly the other cost of this region-wide banking union will be the loss of liberty for many of the freedom loving Europeans, over the interim, or until the dismemberment of the euro currency (and the EU), and of further economic tumult ahead.