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28 April 2013

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The eurozone crisis made simple
02:53, 28 April 2013 by Peter Casey

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The euro will inexorably wind down within three or four years. Photo: Bloomberg

Banking in the balance

Question 1: how did we get into the mess we're in? Answer 1(a): blame German bankers and politicians. It's easy to do. After all, while Edvard Munch's The Scream is an all-too-apt caricature of most of debt-ridden Europe these days, Da Vinci's slyly smiling Mona Lisa may be more appropriate for Germany. No doubt that face took a sharp slap early in the global financial crisis, but German exports broke records in 2011 and, while eurozone unemployment hit 12 per cent in February 2013, Germany had 4.8 per cent unemployment, essentially full employment. To achieve this, it has been exporting cars and other durables like mad, targeting in particular the south of the eurozone, thereby adding to the unsustainable burden of external deficit there. Take troubled Greece. In 2012, Germany exported goods valued at 4.7 billion to that nation, while importing from it just 1.8 billion worth. If an economic powerhouse like Germany cannot buy more exports from the likes of Greece (and Spain and Italy), how can this most troubled eurozone sector ever hope to grow itself out of the current crisis? Having contributed so prodigally to the euro crisis, Germany persisted in lending its eurozone partners the money they needed to keep buying the goods Germany exported. The result is that Germany, the biggest promoter of the euro to begin with, has (so far) come out far ahead of the others who signed up to the concept. Answer 1(b): Blame all bankers and politicians. If Germany deliberately planned all of this as a way to end up controlling Europe by default, it has proved itself sufficiently far-sighted to claim a big lead in a horse race that is, nevertheless, far from finished. Come the home stretch, it might well be that just a few donkeys actually make it over the line. A producer, after all, can lend a consumer only so much. Whatever German bankers and politicians did, they did not do it alone. The short-sighted greed of bankers and politicians throughout the eurozone enabled them, and we consumers and investors were complicit in our turn. ..... Question 2: so how do we get ourselves out of the mess we're in? Answer 2(a): reform European banks. We urgently need banking reform. The EU needs a centralised regulator similar to the US Federal Deposit Insurance Corporation (FDIC), so that depositors can be confident in the security of their deposits, unlike depositors in Cyprus. We need a body with the power to regulate, terrorise and ultimately shut down European banks that break the
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The Sunday Business Post

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rules. On September 25, 2008, the United States Office of Thrift Supervision seized Washington Mutual, one of the biggest US banks at the time, and delivered it into FDIC receivership. As a result, while bond holders and shareholders lost everything, depositors were fully protected. Here in Europe, we need an equivalent authority that will compel banks to behave themselves on pain of seizure and shuttering. Answer 2(b): honour thy treaties and thy covenants. The sad truth is that Mario Draghi, president of the ECB, and Jens Weidmann, president of the Bundesbank, hardly seem to have the stomach for creating an FDIC-like EU authority. Even if such a body were somehow permitted to come into being, Germany would doubtless insist on controlling it. This brings me to the brink of a prediction: we will bumble along for the next three or four years, as the euro kinda-sorta but nonetheless inexorably winds itself down. Gone brittle, the eurozone will finally break in two. One piece will hold the countries that either want or are willing to accept German dominance. The other will consist of those scrambling to arrange as orderly an exit as they can manage. If ever the two pieces (or some part of them) endeavour to come together again, I offer here and now a second answer to my second question. It is: honour thy treaties and thy covenants. The Maastricht Treaty of 1992 was not a stupid document. It obliged signatories to pledge limits to deficit spending and levels of sovereign debt. Early in the new millennium, however, member states oozed and then gushed out of the containers they had promised never to overfill. When debt exceeded treaty limits, national leaders resorted to mortgaging the future by securitising future government revenues in a desperate effort to give the appearance of meeting their promised targets. Securitisation created a labyrinth of complex derivatives that masked the debt-drenched truth from voters and investors alike. By 2009, the mortgages had all come due in the form of a massive sovereign debt crisis. Rules and promises, it seems, work only in the presence of compliance and honour. Peter Casey is founder and executive director of Claddagh Resources, and a panellist on RTE's Dragons' Den

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