Plans for a banking union may not be enough to tackle the eurozone’s economic crisis

Many commentators advocate a banking union as a partial solution to the eurozone crisis, arguing that it will break the ‘vicious circle’ between weak banks and weak sovereigns. Looking at the current role of the European Stability Mechanism, Sony Kapoor and Charles Goodhart write that a banking union may prove ineffectual because equity cannot be injected into weak banks or be used to tackle past losses, and could not be used without a sovereign guarantee. Instead of potentially increasing their liability, they propose that sovereigns should be shored up so they are better able to support weakened banks.