Redesigning EU with Regional Central Banks

In his recent article, Michael Burda, a Professor of Economics at Humboldt University Berlin, suggests the European Central Bank (ECB) should be redesigned with regional rather than national central banks. The column proposes that instead of each country having a national bank, boarders should be drawn to create regional banks. The United States, which has 12 regional banks, is a country that uses this central bank system.

Creating monetary union was risky for the Eurozone because the European Union was not an individual state, but a massive region that has different fiscal policies and governments. Problems with this system include complications in funding for governments and difficulty in refinancing commercial banks. According to Burda, a key part of the Europe’s recovery is redrawing the boundaries of the central banks that constitute the ECB. After restructuring, there is still the problem of different fiscal policies and governments, but they will have less influence over monetary policy.

Bruda states that a logical reformation of the ECB would be one similar to the Federal Reserve System of the United States. In the EU’s current system of national central banks, governments have a lot of impact on the monetary policy. Some of advantages to having regional banks include that they do not feel pressure from state legislatures and they very little to do with the finances of the individuals state. If this system were applied to Europe, the regional banks would have little to do with the finances of individual countries and would not be able to bail them out. According to Burda, “the elimination of national influences from monetary policy would increase efficiency and functionality of the monetary unit.”

In Bruda’s proposal, the European Union is broken down into five regions. Many of the larger countries have parts that are in two different regions. This will also help insure that governments do not have any influence on ECB policy. Under this system, smaller states benefit from breaking up larger countries because they have access to the same resources as the larger countries. Along with the creation of regional central banks, Bruda believes that strict haircuts for the ECB would force countries to become more disciplined with their financing and decrease the amount of borrowing. Without taking politics out of the EU’s monetary policy, Bruda does not believe that the euro will withstand economic shocks that it is bound to see in the next few years.

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