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The financial crisis that hit countries worldwide in 2007 tested and tried deposit guarantee schemes (DGSs) and their ability to protect consumers’ bank deposits. The crisis also served as a reality check for regulators, institutions and the general public alike. Against this backdrop, there was a significant rationale by governments and regulators to protect consumers and at the same time maintain financial stability through expansion of coverage offered in existing DGS arrangements or setting up such a scheme where this was not already in place.

Consumers need other possible safety net in addition to the already set-up lender-of-last resort facilities provided by central banks, banking supervision regulations, assistance granted by international institutions such as the International Monetary Fund and European Central Bank and also the recently enacted EU Bank Recovery and Resolution Directive (BRRD).

In this chapter the authors evaluated whether the launch of a European Deposit Insurance Scheme (EDIS) as a single deposit guarantee in Europe which is now being recognised as one of the three main pillars, together with the single supervisory and resolution mechanisms, would enhance depositors’ protection in times of banking crisis and also reinforce financial stability in the EU as part of the proposed Banking Union.

The chapter made reference to academic literature and also recent EDIS political dossier to outline the developments. Apart from political insensitivity to the proposed EDIS, the chapter also concluded that the introduction of EDIS raises questions about moral hazard amongst banks in the EU, issues on bank’s contributions during the transition period and difficulty in comparing banks across EU countries through banks’ deposits and risk profiles.

This paper aims to analyze the development of European Deposit Insurance (DI) and assess the recent development at the EU level to establish a European Deposit Insurance Scheme (EDIS) in the context of a more integrated financial framework: the Banking Union (BU).

The author uses literature review and empirical evidence to analyze the dynamic interaction among European governments in an effort to attract aggressive deposits with severe repercussion for financial stability.

The paper argues that a liquidity providing EDIS would render regulatory subsidy and rent-seeking behavior persisting by allowing national policies to be pursued with considerable discretionary power and in the context of increasing competition for deposits. This would run contrary to the BU objectives and constitute a major failure of the program.

The findings of the study can be helpful in understanding the DI policies pursued by European governments and their implications.

To the best of the authors’ knowledge, this is the first study that examines the interactions among European governments in pursuing DI policies and assesses the implications of EDIS.

The economic and financial crisis, especially the sovereign debt crisis, discovered many deficiencies and weaknesses in the banking sector in the European Union (EU). The need for special surveillance and supervision of cross-border banking cooperation and termination of the toxic link between sovereign debt and banking sector have accelerated the process of forming and establishing a Banking Union (BU). An integrated financial framework has been established in which the European Central Bank (ECB) through the Single Supervisory Mechanism (SSM) has a key role and the responsibility for the overall supervision of the banking sector of the euro zone. The Single Resolution Mechanism (SRM) and schemes of the Single Deposit Guarantee Mechanism (SDGM) are under the national supervisory authorities while the European Banking Authority (EBA) is responsible for developing the Single Rules. From the new architecture is expected the preservation of the single market and a common currency, breaking “toxic connections” between sovereign debt and banks, mitigation and removal of financial instability and economic growth. The research shows that the BU together with the ECB in a certain sense, also contributes to the normalization of credit and financial conditions in the single mark. Estimates through SSM, conducted by the ECB and the EBA, during, 2014 and 2015 on 107 banks in 21 countries indicate progress toward solvency and resilience of the banking system of the euro area. Despite some initial success the entire project BU seems to have missed on opportunities, resulted in late reactions, and was too complex to be feasible. The political will of national governments to give up sovereignty over its banking sector and transfer competencies to the supranational institutions is a key factor in the success or failure of a BU. It seems so but past experience indicates that there is no political willingness to solve problems. Mainly most of the government avoids cleaning a hidden “skeleton in closets” due to lack of means for recapitalization while some are trying for loans from the ECB to help their banks. The ECB plays a key oversight role at the EU level and has too much power, which can cause risks caused by conflicting goals. The ECB is losing the role of the final refuge of liquidity, which is the main disadvantage of a BU. The SSM is susceptible to criticism due to difficulty in operation because of slow incorporation of European legislation into national law. Slow implementation carries risks of fragmentation of the market, regardless of the responsibility of the ECB. The financial capacity of the temporary agreement with the SRM is insufficient in solving the crisis of more banks while procedural application is complex and time-consuming. Planned backstop with a centralized resource is a resolution that is insufficient for solving the failure of big systemic banks, which are too big to bail. The heterogeneity of the existing Deposit Guarantee Schemes (DGS) and the banking systems of the member states of the euro zone caused controversy in terms of setting of common insurance schemes. The procedures for the recovery and resolution of critical banks are problematic.

In a globalised economy, the EU, being self-confident, could shape international standards by defending and promoting its own socioeconomic model. Social democratic parties rhetorically confess the need for a ‘European social model’, but meanings and ways to achieve it differ largely. In a comparative case study on the programmatic positioning of the German Sozialdemokratische Partei Deutschlands and the Spanish Partido Socialista Obrero Español, the parties' perspectives on the integration mode and their handling of the Economic and Monetary Union framework and its crisis over the last decade are traced. Although similar paths from neoliberal convictions of the ‘third way’ to a positive integration process in a fiscal union setting are found, the scope and levels vary, illustrating the abilities of both parties to meet new transnational challenges. The crisis of the Eurozone was a definitive turning point for the positioning of the Social Democrats in Spain in favour of more political and fiscal integration. In contrast, their German comrades already advocated increased social integration of the EU since 2005 but remained very cautious regarding reforms of the economic framework established by the Eurozone.

This chapter analyzes the rules and institutions that have characterized the European Monetary Union (EMU) during its prolonged crisis, stressing the limits of the strategy pursued by the European authorities. It also examines the issues of current account imbalances, economic growth and the problem of debt, and their interconnections. The main purpose of this chapter is to indicate feasible economic solutions and political arrangements in order to complete the institutional system of the EMU. This requires appropriate reforms of its institutional architecture. But such reforms demand changes in the treaties in order to make the Eurosystem more consistent and endowed of democratic legitimacy, so to have appropriate tools, resources and policies that can contribute to the stability, cohesion and development of the Eurozone.