As the depressing economic and unemployment picture from the European Commission's growth forecasts makes clear, we at Re-Define have been right to be heavily sceptical of the current strategy being pursued by EU policy-makers.
As we warned in July 2012 in our analysis on Spain, the fiscal multipliers being used were highly underestimated. We warned that on the path being pursued, the Spanish economy and employment would be pulled downwards by a combination of fiscal adjustment and related emergent banking problems. This is exactly what has happened. Our analysis was later confirmed by the IMF, when it issued a Mea culpa on having underestimated fiscal multipliers.
The world has still not recovered from the most serious financial and economic crisis in recent history. This exposed several aspects of financial system dysfunction which not only increased the instability of the financial markets but also impeded their normal functioning as tools to allocate economic resources efficiently throughout the real economy. Policy maker response to this crisis remains very inadequate and will do little to correct the deep structural flaws exposed by the crisis.
In this new set of blog posts, we will serialize our 2009/2010 e-book "The Financial Crisis - Causes & Cures" which was written for both the layperson as well as policy-makers at the European Parliament, the European Commission and national finance ministries and regulators. The book may be a bit dated, but the issues are current.
Linda Zeilina: Good Morning Sony, welcome to the first in our new series of 'Conversations with Re-Define'. So, market confidence seems to have returned and there is certain optimism in the air and ECB president Draghi has said that there are signs of ‘positive contagion’. Would you say that the Eurocrisis is finally over?
Sony Kapoor: I think that the optimism has gone too far. The Eurozone real economy is continuing to contract and the situation in Italy and Spain, both of which are amongst the biggest economies in the Eurozone, is particularly dire. France is not doing well either; the Greek economy is now 20% smaller than it was at the start of the Eurocrisis. Nor are Ireland and Portugal in great shape. These are just the countries that we already knew were in trouble. If you cast your net a bit broader, Austria, the Netherlands, Finland, which are supposed to be the stronger economies, are also in trouble and Germany is not immune when all economies around it are shrinking.
Note: This is a longer version of what appeared as an opinion piece in the Wall Street Journal on the 1st of Feb 2013
After a year in which European Union policy makers spent much time obsessing about banking union, it is time to take stock of the discussion. The question today is not about the intellectual case for a more unified approach to bank regulation and supervision within a single-currency area such as the euro zone. That case is still strong. Rather, it is about if what is being pedalled as a ‘banking union’ will deliver the goods—whether it will help tackle the economic crisis that still looms large over Europe or not. Evidence is now stacking up that it will not.
The EU's banking union was sold as a means to break the "vicious circle" connecting weak banks and weak sovereigns—and to do so quickly. As a way to mitigate the risks that troubled banks pose and weak sovereigns pose to each other, however, the plan is looking more ineffectual by the day. Although the European Stability Mechanism (ESM) can inject capital into struggling banks, a number of caveats apply.
Large uncertainties haunt the banking sector in the EU. A lack of clarity about the scope and timing of several pieces of financial sector legislation that are in the pipeline, the macroeconomic headwinds from the unresolved problems of the Eurocrisis and the prospect of a risky transition to a smaller, safer and better-regulated banking system are weighing on investor interest in the sector. Without a renewal of interest from investors in recapitalizing and funding banks, the sector will remain in limbo. In this piece, first published in the Quantum Magazine of the Qatar Financial Centre, Sony Kapoor highlights the key aspects of reforms underway.
The European Union’s initial legislative response to the global financial crisis was much slower than that of the United States, which moved rapidly to introduce the Dodd-Frank bill on financial reform. But, as the economic crisis in the EU deepens, new legislation on the functioning of the financial system continues apace and the Eurozone is now pressing ahead with plans to create a banking union.
The reforms which are in the pipeline will result in a radical transformation of the banking sector. There will be changes in the structure of banks, their capital and liquidity requirements and even a single supervisory authority. However, the speed at which these reforms are to be introduced is much less clear. The new structure will have to be approved by EU governments, balance the needs of Eurozone and non-Eurozone states and take into account the views of the banking sector, which itself remains divided on some of these reforms.