DIIS Comment
Europe, its crisis and its leaders limping ahead, falling behind
Over summer, European leaders and officials have denied that European banks need 'urgent recapitalization', as claimed by the IMF. Yesterday, finally, they changed their minds: EU finance ministers are now discussing bank aid plans. But once again, it is too little, too late for Europe
05 October 2011
European banks need “urgent recapitalization” said Christine Lagarde, Director for the IMF, in late August. She even called for “mandatory recapitalization” – with the use of public funds if necessary. European officials immediately protested that “European banks are much better capitalized than they were even a year ago”.
Now, less than six weeks later events suggest that Lagarde was on to something. This week’s editorial in the Financial Times focuses on the new “crisis of confidence in Europe’s banks”. The bank currently drawing the headlines is Dexia, a Franco-Belgian banking group. It is under review for a possible downgrade by Moody’s over fears that its sources of short-term funding may be drying up. There is much more to this than Dexia, however. Many see the shooting up of overnight deposits with the European Central Bank as a “clear signal that interbank lending may be drying up, not just for Dexia but for others also”. The announcement yesterday by Deutsche Bank – by many considered the ultimate stronghold of European banking – that it would not be able to meet its previously announced profit targets and would have to cut jobs by 500, testified to the depth of the problems in European banking.
European leaders have been reluctant to acknowledge that there is much more to the current crisis in Europe than the sovereign debts of countries in the periphery of the Eurozone, such as Greece, Portugal and Ireland. However, for quite some time now, analysts have pointed to the looming insolvency of the European banking sector as the root cause of the European crisis. A couple of weeks ago, Nicolas Véron, senior fellow at the prestigious Peterson Institute of Economics in Washington gave testimony to the US Congress on the European debt and financial crisis:
“The root of the current turmoil is that Europe's banking system has been in a continuous stage of systemic fragility since 2007–08, in contrast with the United States, where banking crisis resolution was essentially completed in 2009. The current phase is marked by a sequence of interactions between sovereign problems and banking problems, resulting in gradual contagion to more countries and more asset classes. The banking and sovereign crises are compounded by a crisis of EU institutions”.
While European leaders hesitate, again and again, to take decisive action, the crisis grows deeper and deeper. Today’s lead article in New York Times reported growing conviction that Europe is entering the second recession in three years, which could “tip America back into recession and would undoubtedly ricochet around the world”. Some observers, including the likes of Nouriel Roubini and George Soros, even warn that we are heading towards “another Great Depression”
Yesterday, finally, Europe signalled a turn in its approach to the crisis. European Union finance ministers announced that they had concluded that they “had not done enough to convince financial markets that Europe’s banks could withstand the crisis” and that the “capital positions of European banks must be reinforced”. That’s the good news. The bad news is that EU officials had to stress that there was “no formal decision to begin a Europe-wide effort”, but only agreement to coordinate what is done nationally – and that finance ministers have “left open the exact means” of the recapitalization.
The suspicion lingers that European leaders – even in this moment of a crucial realization – is doing little more than limping ahead, several steps behind the curve.
Now, less than six weeks later events suggest that Lagarde was on to something. This week’s editorial in the Financial Times focuses on the new “crisis of confidence in Europe’s banks”. The bank currently drawing the headlines is Dexia, a Franco-Belgian banking group. It is under review for a possible downgrade by Moody’s over fears that its sources of short-term funding may be drying up. There is much more to this than Dexia, however. Many see the shooting up of overnight deposits with the European Central Bank as a “clear signal that interbank lending may be drying up, not just for Dexia but for others also”. The announcement yesterday by Deutsche Bank – by many considered the ultimate stronghold of European banking – that it would not be able to meet its previously announced profit targets and would have to cut jobs by 500, testified to the depth of the problems in European banking.
European leaders have been reluctant to acknowledge that there is much more to the current crisis in Europe than the sovereign debts of countries in the periphery of the Eurozone, such as Greece, Portugal and Ireland. However, for quite some time now, analysts have pointed to the looming insolvency of the European banking sector as the root cause of the European crisis. A couple of weeks ago, Nicolas Véron, senior fellow at the prestigious Peterson Institute of Economics in Washington gave testimony to the US Congress on the European debt and financial crisis:
“The root of the current turmoil is that Europe's banking system has been in a continuous stage of systemic fragility since 2007–08, in contrast with the United States, where banking crisis resolution was essentially completed in 2009. The current phase is marked by a sequence of interactions between sovereign problems and banking problems, resulting in gradual contagion to more countries and more asset classes. The banking and sovereign crises are compounded by a crisis of EU institutions”.
While European leaders hesitate, again and again, to take decisive action, the crisis grows deeper and deeper. Today’s lead article in New York Times reported growing conviction that Europe is entering the second recession in three years, which could “tip America back into recession and would undoubtedly ricochet around the world”. Some observers, including the likes of Nouriel Roubini and George Soros, even warn that we are heading towards “another Great Depression”
Yesterday, finally, Europe signalled a turn in its approach to the crisis. European Union finance ministers announced that they had concluded that they “had not done enough to convince financial markets that Europe’s banks could withstand the crisis” and that the “capital positions of European banks must be reinforced”. That’s the good news. The bad news is that EU officials had to stress that there was “no formal decision to begin a Europe-wide effort”, but only agreement to coordinate what is done nationally – and that finance ministers have “left open the exact means” of the recapitalization.
The suspicion lingers that European leaders – even in this moment of a crucial realization – is doing little more than limping ahead, several steps behind the curve.
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EU
Europe, its crisis and its leaders
limping ahead, falling behind