In the last few weeks, the idea of establishing a European banking unionhas become the latest remedy advanced as a solution to the long-running eurocrisis. But, whatever the merits of a banking union – and there are many –proposals to establish one raise more questions than can currently be answered.

The motivations of those who advocate a banking union differ markedly. For some, particularly in southern Europe, it is seen as a means of shifting the burden ofsupporting their indigent banks to those with deeper pockets. For others, especially in theEuropean Union’s Brussels Eurocracy, it is seen as another leap forward in theconstruction of a European super-state. Taking their cuefrom the sacred Rome Treaty’s reference to“ever closer union,” the European Commission’s theologiansview every crisis as an opportunity to advance their federalistagenda.

The European Central Bank has been more thoughtful, though no less enthusiastic, arguing that a banking union shouldhave three objectives. First, strongereurozone-wide supervision should reinforce financial integration, “mitigatemacroeconomic imbalances,” and improve the conduct of monetary policy. How asingle EU supervisor would address the problem of imbalances is not explained,but it is surely a worthy aim.

The second objective should be to “break the link between banks and sovereigns,” which hasbeen a particularly dangerous feature of the last year, while the third is to “minimize the risks for taxpayersthrough adequate contributions by the financial industry.” The third aim couldbe achieved country by country, but it is certainly arguablethat an across-the-board banking levy, or aEurope-wide financial-transaction tax, would eliminate competitive distortions.

How might these laudable objectives beachieved? The European Commission has argued that a fully-fledgedbanking union would need to rest on four pillars: a single deposit protection schemecovering all EU (or eurozone) banks; a common resolution authority and commonresolution fund, at least for systemically important and cross-border banks; asingle European supervisor for the same banks; and a uniform rule book for prudential supervision of all banks in Europe.

Anyone who has been involved in banking supervision can see at once thatthese four pillars will require careful construction. Many individual countrieshave taken a generation to develop their own domestic schemes. And, in thiscase, three big political issues have yet tobe resolved.

First, the identity of the single European banking supervisor remainsundecided, and the ECB has seen an opportunity for a powergrab. Central bankers in Europe havealways resented the narrow monetary-policymandate given to the ECB under the Maastricht Treaty. Banking supervision wasnot included among the ECB’s objectives, though one article of the treaty givesthe system of European central banks as a whole the task of contributing toeffective supervision. They now argue that the simplest solution would be toexpand that remit and make the ECB the defacto pan-European supervisor.

That is not the outcome favored by theEuropean Commission, which has only just set up the European BankingAuthority. The EBA is closely linked to the Commission itself, and is seen asthe natural candidate for a broader role.

The Commission has a case, but it also has a problem. During the politicalhorse-trading that precededthe creation of the EBA (together with two equivalent bodies for securities andinsurance), it was agreed that the new authority would be based in London. That seemedlogical at the time, but not if the EBA’s role is to be broadened. How could aeurozone supervisor be based outside the eurozone?

The second unresolved question is how to achieve a banking union in legalterms. Constitutional change on this scale would normally require a newEuropean treaty. But that would take time, and Europe’sleaders have run out of it.

Furthermore, there is no guarantee that voters in countries that require areferendum on treaty changes would support afurther transfer of sovereignty. So the likely outcome is that, in the EU’s time-honored fashion, the banking union will beconstructed using existing powers, finessingthe sovereignty question, and avoiding any reference to public opinion. Thatpoints towards reliance on the ECB.

The final question is what such a eurozone banking union would mean forthe single financial market, and especially for EU countries that are outsidethe single currency. Many of them would sign upwillingly, as they intend to join as soon as possible, in spite of the euro’sdifficulties. But that is not the case for the United Kingdom, and Londonremains the continent’s biggest financial center, by far.

I fear that the French and Germans have now lost patience with the troublesomeBritish, and are reluctant to cut a deal.And Euroskeptic British politicians see thisas an opportunity to recast the UK’srelationship with the EU; indeed, for some, it means a chance to negotiate anexit.

Opinion in the City of London tends to favora middle way, which would allow the UK tocling to the benefits of the single market, without conceding unified regulation. That will be hard topull off.

I suspect that a banking union of some kind will be implemented, and soon.Otherwise, the eurozone banking system will collapse. But the consequences ofsuch a step for Europe’s great free-trade experiment could be serious, and, ifnot managed carefully, could lead to Britain’s withdrawal. The politicalstakes are high, and the outcome is likely to reflect that.