The European University Institute hosted a symposium on Europe’s banking union last Friday, 22 May. The organizing theme was the interaction between ‘banking union’ as a form of integration and ‘democratic legitimacy’. My contribution was to try and frame that question within the larger context of European financial market integration. What follows is the formal presentation.
Last week my SAIS colleague Filippo Taddei gave an interview to a Bloomberg journalist about the Greek crisis where he argued that there is no necessary link between a Greek government default and the exit of Greece from the euro area. The reason, Taddei explained, is that a government default is only relevant to Greece’s euro membership insofar as such a default would wipe out many of the assets — and essentially all of the collateral — of the Greek banking system. If that were to happen, then the Greek central bank would have no choice but to give loans to the country’s commercial banks against little or no collateral in order to maintain the liquidity of the Greek financial system. Moreover, everyone is aware of this fact. You only have to look at what happened during the second Greek bailout in March 2012 to see the connection. Hence it is only reasonable to assume that the European Central Bank (ECB) would either accept the extraordinary measures of the Bank of Greece to keep the Greek banking system afloat or come up with some arrangement of its own to restock the collateral of the Greek banking system and restore its liquidity during the process of resolving the Greek government’s default. Indeed, Taddei suggested, people active in European economic policy circles are already planning along those lines.
The polls have closed and the votes are counted on what has been one of the more surprising British parliamentary elections in history. The Conservative party has emerged with a narrow effective majority in the United Kingdom; the Scottish National Party has an overwhelming majority in Scotland. Only one of these two outcomes was expected. The Conservatives were supposed to outperform Labour, but not by such a wide margin and never at such a huge cost to their Liberal Democratic coalition partners. By contrast, the Scottish vote was expected, although many pollsters imagined that tactical voting would prevent the SNP from emerging with so many seats.
On 7 May the United Kingdom will hold the closest election since, well, the last election. The result is widely expected to be a ‘hung’ Parliament: neither the Conservatives nor the Labour Party will emerge with enough seats to control a majority. Although both parties are currently (4 May) projected to receive roughly 34 percent of the votes, the Conservative should come out with a five seat lead when the these votes are translated into Members of Parliament. That gap is too small for the Conservatives to form a coalition government with the Liberal Democrats, even relying on the support of the Northern Irish Democratic Unionist Party. It is too large for the Labour Party to form a minority government with the support of the Scottish Nationalists. By implication, either the Liberal Democrats will have to lend their support to Labour, or Labour will have to vote with the Conservatives to dissolve the Parliament with new elections to be held in October. Of course these projects could change by election time. The calculus of possibilities would obviously change along with it. In a close election like this one, even small differences can have a big impact in terms of outcome.