Is Integration the Solution?



Is Integration the Solution?

Greece only represents 2% of the EU economy but if it decides to leave the euro or renegotiate the bailout there is a risk of contagion and a consequent flight of capital, says Prof. Xavier Vives. The EU may try to stabilize Europe’s finances through a European banking union that would act as a cross-border supervisor, insurer, regulator and troubleshooter, overriding sovereign financial institutions.

If Greece decides to leave the euro, it could spark greater instability in the euro zone and lead investors and depositors to flee from other peripheral countries. A more integrated banking system in Europe could help pave the way for stability in the future, says IESE Prof. Xavier Vives of the Department of Economics. 

Deeper financial integration would  break the close link that currently exists betweeen sovereign risk and banking risk. With this in mind, the EU has proposed setting up a single banking union, which would serve as supervisor, insurer and regulator for the euro zone.

IESE Economics Weekly