The Cyprus fiasco has the hallmark of a classic whodunit. Someone somewhere took a decision that now no one no-where appears to have made – to impose an unprecedented levy on bank deposit holders in Cyprus. Most commentary on the deal has been terribly negative, sometimes alarmist – it will spark off bank runs in Spain or that it rips the shirts of the backs of the poor in Cyprus. There were some exceptions to this negative coverage including yours truly.
A school of thought agreed with the need for a depositor bail-in but was uncomfortable with not exempting depositors under the Euro 100,000 deposit insurance cap – though technically such a limit is irrelevant for the clever levy that has been proposed. We at Re-Define belong to this school and did not criticize the concept of bailing-in depositors having agreed with the IMF that this was both fair and unavoidable in order to make the numbers add up in the rescue of Cyprus.
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.
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.
This piece was written on the 14th of September and appeared as an Op-Ed in the Wall Street Journal on the 20th of September
Markets have been euphoric about the recent good news in the euro zone: the European Central Bank’s promise of potentially unlimited bond purchases, the announcement of a banking union, Germany’s green light for the European Stability Mechanism (ESM), a pro-European result in the Dutch election, and a softer EU stance on Greece.
All of this is in marked contrast to the fears of a summer meltdown that never quite happened. Could this be the beginning of the end of the euro zone’s crisis?