Shadow of Noose Speeds Up Banking Union; The deal euro-zone leaders are expected to agree upon is far more substantial than had seemed possible.
Nothing concentrates a man's mind quite like the prospect of being hanged in the morning, observed Samuel Johnson, the 18th century English writer. In a similar vein, two factors helped concentrate the minds of European governments in recent weeks as they thrashed out important details of the euro zone's proposed banking union.</br></br>The first was the European Parliament elections scheduled for May next year. These are expected to result in large gains for euro-skeptic and extremist parties, which could make it much harder to agree on complex legislation involving a substantial pooling of sovereignty.</br></br>The second is growing anxiety in the markets and among some policy makers that the euro zone is sliding into deflation. With interest rates already close to zero and no easy way to further loosen monetary policy, a credible banking union is the euro zone's best chance to reduce financial fragmentation and reduce borrowing costs in the periphery.</br></br>The result is that euro-zone leaders are expected this week to agree upon a far more substantial banking union deal than had recently seemed possible. This deal will include a legally binding set of arrangements for the winding up of failed banks--the so-called Single Resolution Mechanism--to be headed by a Single Resolution Board with access to a Single Resolution Fund to help pay for the cost of clearing up bank failures.</br></br>The speed with which the deal has fallen into place has surprised officials. Germany had previously ruled out any common euro-zone fund to help pay for winding up failed banks, insisting instead on a network of national funds.