Eurozone’s banking union blown up

The thing about a formal banking union for the eurozone, of the sort recommended by Jose Manuel Barroso, President of the European Commission, is that it is a covert or backdoor form of fiscal union (see today's FT for more on this).

In a banking union, eurozone states would pool their resources to act as the insurers or guarantors of last resort for the deposits in eurozone banks and for bailouts of banks that get into difficulties (this would be true, even if banks subscribe to a deposit protection fund, because there would never be enough in this fund to deal with all possible crises).

The economic effect would therefore be more-or-less identical to eurozone governments borrowing collectively by issuing so-called eurobonds. Here is why: the biggest lenders to eurozone governments are eurozone banks; so in a banking union, eurozone governments would club together to - in effect - collectively give banks the resources to lend to individual governments.

So - and I hope you are still with me - since Germany is opposed to using its financial strength to help other countries borrow through the sale of eurobonds, Germany would inevitably be opposed to helping other countries borrow by underwriting their respective banks.

And so it has proved - with the Bundesbank signalling its opposition to a banking union of this sort.

All of which is a long-winded way of explaining why the borrowing costs of the government perceived to be most financially over-stretched, Spain, have soared today to record levels - in that the dispute over whether to go for a banking union shows that the eurozone is as far as ever it was from a fundamental solution to its woes.