I know I am not alone in arguing that fixing the broken banking system is the essential prerequisite to recovery. I want to share a thought on how to move on fixing Europe's banks which might just be politically feasible.
The problem we have is that for countries to deal with the problem by nationalising, refinancing or recapitalising their banks is massively expensive. At a time when Euroland politicians have persuaded themselves that the problem is government debt, it is politically impossible for countries to borrow to cover the cost.
My thought is that a banking resolution regime could be organised at the European level and financed by the issue of Eurobonds. A new institution would be needed to issue the bonds and hold the shares of the rescued banks. In time the assets could be sold and the money used to buy back the bonds.
Germany has objected to the issue of Eurobonds in the past, but this was in the context of pooling sovereign debt. Germany fears creating "moral hazard" where profligate southerners would lose the incentives to borrow less. However issuing Eurobonds for a limited purpose, especially where the assets would be jointly owned is different. In fact Eurobonds already exist on a small scale as the European Investment Bank raises money this way.
