By Simon Nixon 

The European Union is widely blamed for many of the continent's current difficulties. Critics accuse Brussels bureaucrats of riding roughshod over national sovereignty, crushing economies with unworkable fiscal rules, stifling enterprise with red tape and tearing down national borders to expose EU members to unrestrained migration and a growing risk of terrorism. Euroskepticism now dominates the political agenda in countries as varied as the U.K., France, Poland and Italy.

But this narrative misses the point. Contrary to the lofty rhetoric of some federalist dreamers, what marks the EU isn't its power but its weakness. The European project has advanced over the years in response to crises, exactly as its founder Jean Monnet predicted. Its member states have consistently reached for common responses to common challenges. But other than in the areas of trade and competition policy, real power continues to belong to national governments. If the European project now faces a real danger of collapse, the fault lies more with member states than Brussels.

Take the case of the EU's banking union, the bloc's flagship response to the eurozone crisis. Last week, the European Commission published new proposals to create a common European deposit-insurance system, which many economists argue is vital if the banking union is to succeed. Indeed, the commission's decision to present this proposal followed a recommendation by the heads of the main EU institutions earlier this year in their so-called Five Presidents Report, which concluded that common deposit insurance was an essential step to restore confidence in the long-term viability of the single currency.

In many respects, the case for pushing ahead with common deposit insurance is impeccable. National governments have already given up responsibility for regulating banks and winding them up if they fail, so its makes sense that the costs of bank failure should be borne at the European level too. What is more, without common deposit insurance, Europe's banking union is likely to remain a banking union in name only: so long as the quality of the guarantee underpinning a bank's deposits is dependent on the country in which the bank is based, a genuine cross-border banking market is likely to remain elusive. Conversely, the whole of the eurozone stands to benefit from the creation of a genuine cross-border market.

Yet even this relatively modest proposal, chosen because pooling deposit guarantee funds is far less ambitious than some other ideas to increase eurozone risk-sharing, may prove too difficult. That is because the necessary trust among member states has evaporated, reflecting fears that some countries are either unable or unwilling to reduce the risks arising in their own jurisdictions.

Part of the problem lies in the failure of member states to implement even what has been agreed upon already, including the EU's new rules for "bailing in" creditors of failing banks and for winding up failed banks, even though those new rules are supposed to come into force Jan. 1. Only last week, the Italian government took the decision to bailout four small and systemically unimportant lenders which, while not yet illegal was certainly contrary to the spirit of agreed-upon EU rules. At the same time, the EU's supposedly common banking rules remain full of national loopholes and exemptions so that there is no level playing field.

But these problems should be easy to resolve compared with the much bigger risks arising from the actions of national governments. After all, only this month Greek banks were forced to raise EUR14 billion ($14.8 billion) in new capital to plug holes arising from Athens's destructive, six-month standoff with its creditors over its bailout program. Should depositors in the rest of the eurozone be forced to insure depositors in other countries against the consequences of the economically ruinous policies of their national governments?

Similarly vast differences in national foreclosure rules and insolvency frameworks can have a material impact on bank solvency. Greece, for example, is to exempt a quarter of mortgage-holders from new foreclosure rules, while in Italy it can take up to 10 years for a bank to seize defaulted collateral. Why should depositors in other countries be exposed to these risks?

Brussels officials hope that their plan, which foresees only a gradual pooling of deposit guarantee funds, can be used to drive harmonization of legal and institutional standards. But the wider political risks arising from national government policy choices can't be simply wished away--and these risks are rising along with the electoral fortunes of euroskeptic parties. Only this week, a new minority Portuguese government took office backed by parliamentary support from the anti-EU Communist party.

Some argue that the best response to the euroskeptic challenge is to show that the EU can still deliver common solutions to common challenges by pushing ahead with projects such as common deposit insurance. But if those common solutions depend on the willingness and capacity of national governments to deliver their side of the bargain, this may prove a leap of faith too far.

(END) Dow Jones Newswires

November 29, 2015 13:38 ET (18:38 GMT)