This appeared as a Comment piece in the Observer (Guardian) on 11th December
EU leaders promised to stop Europe’s spiral into economic oblivion. They needed to immediately restore confidence in the solvency of Spain and Italy, urgently take steps to kick start growth and credibly commit to changes addressing the institutional weaknesses of the Euro area. They failed on all three fronts and are now almost out of time.
Given the inability of EU leaders to tackle the problems of Greece, a small economy, investors have been losing faith in their ability to support the much larger economies of Spain and Italy that faced economic problems. This has driven up the borrowing costs to unsustainable levels. Unless policy makers can demonstrate how troubled EU economies could meet their borrowing needs at non-penal interest rates, the crisis would continue to deepen.
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 Euro area now has a systemic crisis. It is no longer possible to believe that the crisis is limited to the peripheral countries with Spanish and Italian borrowing costs staying high after having breached levels not seen since the birth of the Euro. August also saw questions being raised about the sustainability of French public finances and growth came to a dead halt. September has seen doubts being raised about the soundness of EU banks. Germany can no longer pretend that it does not face a domestic problem now that upheavals in the Euro area have, led to a collapse in German growth.
Unfortunately many sensible things such as reducing the stock of Greek debt, forcing greater and faster recapitalization of EU banks and introducing a bigger and more flexible design for the European Financial Stability Fund and the European Stabilization Mechanism from the outset were rejected by the European Commission, the European Council or the European Central Bank, sometimes all the institutions at once.
This unwillingness and inability to make sensible choices has led us down the wrong fork in the road and is directly responsible for the crisis having morphed from being a containable crisis in the periphery to one which has now infected the core and become systemic. Enormous damage has already been inflicted on large swathes of the EU economy and will cost EU tax payers dearly. Many jobs have now been destroyed, some permanently and the handling of the crisis has done lasting and irreparable damage to the European project. It is now no longer possible to say with certainty that the Euro or even the European Union itself is safe.
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.
Re-Define commentary on the statement from the Euro Leaders' Summit
We reaffirm our commitment to the euro and to do whatever is needed to ensure the financial stability of the euro area as a whole and its Member States. We also reaffirm our determination to reinforce convergence, competitiveness and governance in the euro area. Since the beginning of the sovereign debt crisis, important measures have been taken to stabilize the euro area, reform the rules and develop new stabilization tools. The recovery in the euro area is well on track and the euro is based on sound economic fundamentals. But the challenges at hand have shown the need for more far reaching measures. (Re-Define Comments are in italics. For Press Release Click Here and for a PDF version of this commentary Click Here.)
The recovery in the Euro area is not well on track and in fact remains very fragile with some possibility of a double dip. Moreover, our banking system remains weak both in terms of structural maturity mis-matches in funding and capital adequacy.
We may have better economic fundamentals than some other economies at an aggregate level but our decision making has been exposed as being far too slow and has seriously dented our credibility.