The logic of a banking union for Europe

In the wake of a sovereign debt crisis, which was itself preceded by a banking crisis, the European Union (EU) is in the process of creating a banking union for the euro area. Such an integrated financial framework is considered necessary for completing Europe’s economic and monetary union. Why? Is a banking union for the euro area (and the EU more broadly) really necessary? This article argues that a banking union in Europe may not be necessary for the euro’s survival and functioning but it is likely to help reduce inherent tensions in the system. Without an effective banking union, financial integration is costlier and it puts all the pressure for financial stability on the European Central Bank’s shoulders.