10-20-2013 05:00 AM

Europe’s Slow Progress on Banking Reform

The European Union last week moved one step closer to establishing a banking union that could help address problems in its financial system. But the Continent’s leaders need to act faster and do much more to end the long-running crisis.

Finance ministers of E.U. countries agreed Tuesday to give the European Central Bank regulatory authority over large banks in countries that use the euro. Countries like Britain that do not use the common currency can continue to regulate their own banks. This should improve the supervision of banks in economically weaker countries like Spain, Portugal and Italy. National regulators will continue to have some responsibilities, like ensuring consumer protection and policing money laundering, but the E.C.B. will be in charge of overall safety and soundness, which should give depositors and investors more confidence in the banking system.
While a good start, giving the E.C.B. supervisory authority will do little to clean up financial excesses that have become a yoke around the euro zone’s economy. For that, the European Union has to carry out its plans to create a centralized system for shutting down failed banks and recapitalizing weakened lenders. But those plans have been stymied and delayed by Germany, which has a strong aversion to having a central European fund used to bail out reckless banks that were not properly regulated.
On Tuesday, Germany’s finance minister, Wolfgang Schäuble, insisted that central funds could not be used to recapitalize banks as envisioned in European plans for a banking union until German laws were changed. Previously, he said that a banking union could not be created until treaties that created the European Union and the euro were amended.
It’s possible to restructure the banking system without being overly generous to bank management and shareholders. European leaders can require that taxpayer funds are used only after banks appoint new executives and all shareholders and at least some bondholders accept losses. But it is important that the E.U. act soon.
Putting off the difficult work will only inflict further damage on the Continent’s economy and perpetuate chronic unemployment. At the end of June, 49.6 percent of the 19 million unemployed people in the euro zone had been out of work for more than 12 months, according to the Organization for Economic Cooperation and Development. That was up from 46 percent a year earlier.
No economy can thrive when its banks are undercapitalized and mired in bad debts. Will European leaders take the steps needed to resuscitate their troubled financial institutions?
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A version of this editorial appears in print on October 20, 2013, on page SR12 of the New York edition with the headline: Europe’s Slow Progress on Banking Reform.

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