Eurobonds

Europe's dance of death between sovereigns and banks

Note: This is my response, in the Financial Times A-List, to George Soros\'s suggestion that the the EU guarantee its banks. Re-Define believes that the most sensible thing to do is to first reassure the world that sovereigns such as Italy and Spain are sound

George Soros is right in saying the discussion on recapitalisation of European banks is flawed. However, the best way to address the panic in the banking system is not through guaranteeing the banks, but through restoring full faith in the solvency of large Eurozone economies instead.

Weaknesses in the European banking system have been known for some time, so why the sudden panic?

European Union policymakers have let Greece’s unique fiscal problems colour their prescription for countries such as Spain and Ireland which had banking, not fiscal, crises. Growth has also suffered in other countries, as austerity measures became fashionable. This economic slowdown, weak stress tests and the EU’s inability to handle the relatively small problems of Greece, combined to also erode confidence in Spain and Italy.

The Systemic Crisis in the Euro Area and the ECB

 
Note: This is the english text of an invited Op-Ed that appeared in El-Mundo, one of Spain\'s leading newspapers on Sunday the 11th of September
 
With Spanish and Italian borrowing costs staying stubbornly high, an increasing possibility of the collapse of the new Greek debt deal agreed just in July and the collapse of growth in Germany and France the Euro area is now in the grip of a serious systemic crisis.
 
How we got from what started out as a fiscal problem in one of the smaller economies in the Euro area, Greece, to this systemic crisis is a tale of bad politics and bad economics. EU leaders and institutions have failed its citizens repeatedly in the past three years. Sensible policies such as reducing the stock of Greek debt, forcing a greater and faster recapitalization of EU banks and designing a bigger and more flexible European Financial Stability Fund from the outset were rejected by the European Council, Commission or Central Bank, sometimes by all institutions at once.