Mr. Colm McCarthy:

It would be a catastrophe because it would turn what had been billed as a durable monetary union into some kind of an ad hoc, quasi-fixed exchange rate regime, from which countries could be kicked out. That would have a very bad effect.

On the Senator's question about the completion of banking union, there are three components of a proper banking union. The first is centralised supervision of the banks, the second is centralised ex anterules for the resolution of failed banks and the third is liability insurance for banks, in particular, for small retail deposits. All that has been achieved in Europe is the first of these components, namely, centralised supervision of, I believe, 123 listed banks. The European Banking Authority, which is an offshoot of the European Central Bank, did an asset quality review of these banks last year and this review was followed by stress tests and so forth. The Senator is correct that nearly all the banks passed the stress tests, including the Greek banks. What we have seen in recent weeks in this so-called banking union is the ECB refusing to act as lender of last resort in the face of a deposit run, thereby closing down four banks that it supervised and to which it gave a clean bill of health last year. These banks recapitalised themselves to the tune of €8.5 billion last year.

While it is very hard to make me feel sympathy for banks, I have sympathy for the four Greek banks because the lender of last resort ran away when it saw a deposit run against them. Central banks were invented in numerous countries in the last century and even later in the United States - I mean the 19th century. I apologise for repeatedly referring to the 19th century as the last century despite having 15 years to get used to the change. The reason for the creation of central banks was largely to create a public good, namely, the ability to stop depositor runs against banks that were solvent. The actions of the European Central Bank in recent weeks will feature in the textbooks in the years ahead because the ECB helped to accelerate a run against banks which it had deemed to be solvent and had supervised. It did so by pulling its liquidity support on 28 June last in what was an extraordinary sequence of events.

As for bank resolution, one of the reasons the Greek banks were not deemed to have been insolvent was that to have deemed them insolvent would have triggered their recapitalisation by the European Stability Mechanism and no one wanted to do that. Members will recall the famous proposal for retrospective recapitalisation of the Irish banks which was declined and did not take place. Klaus Regling and others stated this could not be done because the European Stability Mechanism was to fund future bank insolvencies and would not be used for retrospective recapitalisation. If it is now believed that the Greek banks are bust, ESM recapitalisation, if it is effective, should be triggered because the present is what was then the future.

It is simply not the case that a banking union has been agreed to, the reason being that several member states do not want a banking union. What has been undertaken is centralised supervision. Supervision has never prevented bank busts, however. For example, there were big bank busts recently in the United Kingdom, which has had national bank supervision in place for a couple of hundred years and still does not seem to have got the hang of it. There will always be bank busts because banks are fragile institutions. Centralised supervision is an improvement, particularly in countries which are bad at doing supervision, as Ireland was, but it is nuts to believe that supervision will prevent future bank busts.

What would prevent them from creating mayhem is a properly funded bank resolution system and a properly funded deposit insurance system for retail customers of banks who have been queueing outside banks in Greece for the past six months. We do not have those things. They have not moved to a banking union; they have made some steps in that direction, but it is not complete.