Financial Reform In (Eastern) Europe: Which Way?

Since the financial crisis of 2007-2008 and the economic depression as well as the sovereign debt problems that ensued, the official international reaction has been preponderantly in favor of more regulation and central inter-coordination and planning. Specifically, in Europe, the European Financial Stability Fund (later the European Stability Mechanism) was created to bail troubled institutions out. The European Systemic Risk Board was created in 2010 and similar or subordinated organisms are being established at national levels in order to assure that the stability, once propped by the aforementioned organisms, is not lost again. The ESRB is geared precisely toward more centralization of policy and coordination between regulatory and supervisory agencies hitherto more specialized and limited in scope. The present paper analyses the general solution chosen by the EU and discusses the possibility and consequences of alternative financial arrangements. Starting from the essential insight that the main historical root of world financial instability is the practice of fractional reserve banking, we argue that the European chosen solution is ultimately headed to failure, and so is the Europe-wide bail-in suggested more recently, while there are alternatives, discussed herein, that are more or less suited to bring a future of financial stability.