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Monetary policy and wealth inequalities

In the last fifteen years, we have been through different interlocking crises (e.g., the great financial crisis, the sovereign debt crisis, the Covid-19 crisis, the energy crisis) and after each one, disparities in income...

The launch of the Economic Monetary Union (EMU) in 1992 was a key event in the economic integration of the Member States’ economies. The coordination of the European Union (EU) economic, fiscal, and monetary policies was further completed by the introduction of a common currency on 1 January 1999, and by the circulation of euro banknotes and coins started in 2002. While these centralising transformations occurred, no changes were put in place regarding the authorisation and micro-prudential supervision of banks in Member States. Unexpectedly, such unchanged setting remained after the Treaty of Lisbon, which was signed in 2007 and entered into force in 2009, and after the De Larosière Report that was issued in 2009. Remarkably, since 1992 the monetary policy of the Member States was set to become a supranational competence of the European Central Bank (ECB), but the supervisory powers of the EU banking system were set to remain with the national supervisory authorities. This centralising mismatch between the EMU and the banking supervision echoes a larger debate regarding the division between monetary policy and banking supervision.

In 2012, in the ‘Van Rompuy Report’, the President of the European Council identified what today is called Banking Union (BU), as one of the four building blocks of the EMU. The same narrative was shared three years later by the European Commission in what is known as the ‘Five-Presidents Report: Completing Europe’s Economic and Monetary Union’. The BU was launched in 2014 and is one of the two pillars of the Financial Union (FU), being the second one the Capital Markets Union (CMU). On the one hand, the main goals of the BU are to strengthen banking supervision and to break the fragmentation of the EU banking market. To achieve these goals, the BU framework has required three major moves: supervisory convergence by centralizing supervision of the most significant institutions in one authority, the ECB; a single framework for the orderly resolution of failing banks and banking groups, with minimum impact on the real economy and public finances of the participating Member States; and a harmonised deposit guarantee scheme set up to protect retail deposits in the EU. In detail, the moves taken within the BU project reformed the EU banking landscape through the set-up of the Single Supervisory Mechanism (SSM), the Single Resolution Mechanism (SRM) and the intent to establish in the future a European Deposit Insurance Scheme (EDIS). On the other hand, the background and origins of the CMU are linked to different drivers and objects, which partially explain why it remains a project on paper. Yet, more political consensus to enforce the capital markets structure in the EU is expected and we may witness a hastier establishment of the CMU.

In that context, it is persuasive to believe that the Financial Union, and in particular the Banking Union was the needed step for more economic integration in the EU and for the establishment of an internal market – even without a Financial Crisis. In 2012, when financial stability was at stake, it was logical to deepen economic integration through a Fiscal Union with all the Member States. However, in times of crisis it was not politically feasible to choose this option, as it entailed higher cross-border costs. Some authors therefore claim that the launch of the BU (as a part of the FU) was a reaction from the EU to the Financial Crisis. Other says it is a necessary pillar for the deepening of the EMU. Perhaps one could argue that it is both.

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