Institutional Competition as an Alternative Mechanism for Harmonization in Monetary and Banking Unions

Abstract

The latest election for the European Parliament in May 2014 resulted in substantial gains for EU-skeptical parties across the EU. We argue on economic grounds that more flexible integration within the EU could increase the support for the integration process across the heterogeneous group of member states. In many areas the more flexible integration process could develop as a result of institutional competition. In other areas a minimum degree of harmonization may have to be imposed on all members. Costs and benefits from harmonization and requirements for efficient institutional competition are discussed generally as well as specifically for central banking in the EMU and for the regulatory framework for a Banking Union. There are indications that the EU has become more flexible with respect to new membership in the EMU but the push towards harmonized banking regulation is strong for members of the EMU. An alternative route to a banking union would be to impose minimum standards for bank insolvency procedures while other aspects of regulation would develop in institutional competition.

Keywords: Institutional Competition, Harmonization, Monetary Union, Banking Union

JEL Classification: F5, F55, G18, H80, K33