The Eurozone needs a grand political bargain

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.

Europe's Sham Banking Union

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.

EU banking, whither now?

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.

Has the Euro Crisis turned a corner?

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?

The limits of ECB intervention

This piece was first written and circulated on the 2nd of September and appeared as a comment piece in Le Monde on the 10th of September 

The Eurocrisis is on a pause as markets and EU leaders alike wait with bated breath for ECB. President Draghi, who has promised the European Central Bank will not let the Euro fail, to reveal his hand. They are right to think what the ECB will say or do is very important, but it is hard not to feel that too much is being expected of the ECB.

Between the things the ECB cannot do and the things it will not do, its ability to deliver a sustainable ‘big bang’ has been severely curtailed. There are three main reasons to suspect that no matter what the ECB does this week or the next it will not be sufficient to stem the Eurocrisis. Those who have their hopes riding on the ECB are best advised to recognize that while larger scale ECB interventions are necessary, they are simply not sufficient to bring the Eurocrisis under control.