EUROPE PLANNING TO SOLVE THE WRONG CRISIS / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( A MUST READ )

Europe planning to solve the wrong crisis

By Wolfgang Münchau

Published: February 6 2011 20:26

So you think the crisis is over? Some of Europe’s political leaders have always framed the eurozone’s year-long upheaval as an attack by Anglo-Saxon speculators. If that is your view, you can relax. The speculators are moving in the opposite direction. The markets have calmed down. The crisis is over by definition.


That is, of course, intellectually lazy. Equally lazy is the attempt to frame it purely as a fiscal crisis. It was only ever a straightforward fiscal crisis in Greece. Nowhere else. Fiscal regime change is thus logically no solution.


Any serious discussion about a permanent crisis resolution mechanism would have to start with a more precise definition. I would describe it as a crisis of contingent liabilities that arise from undercapitalised and nationally fragmented banking systems, aggravated by a competitiveness gap. On its own, the competitiveness component would be in the “hopeless but not serious” category. But a joint debt and competitiveness problem is serious.


If you agree this is the crisis you need to resolve, a plan to harmonise the pension age or a focus on cross-border labour mobility is daft. But that is what the discussion in Brussels is currently about. A more serious approach to crisis resolution would start with a comprehensive European Union-wide plan to recapitalise and shrink the banking sector. Then, you would restructure whatever sovereign debt needs restructuring. So why dream about policy co-ordination mechanisms in a post-crisis world, instead of solving the crisis we already have?


Of the two critical issues of crisis resolution – bank recapitalisation and sovereign debt restructuring – we are regressing on the first and possibly underestimating the consequences of the second. It is hard to estimate the exact amount it will cost to recapitalise the European banking sector. I have heard a credible estimate of €100bn-€200bn. Last year’s bank stress tests came up with a puny €3.5bn – a deliberate attempt by Europe’s regulatory authorities to misrepresent facts and mislead the public. Everything I hear about the next round of stress tests tells me they will once again try to hide the truth.


Why is the EU so reluctant to solve the crisis, given what is at stake? There are two reasons. The first is that national regulators focus on their own banking sector’s competitiveness. They fear genuine stress tests, conducted from London by the European Banking Authority, might disadvantage their own banks. The second is that it would be very costly. Governments would need to commit actual money to nationalise, and recapitalise, their banks.


Outsiders are often amazed to hear that all the bail-outs so far – the loan to Greece last year and the set-up of the European Financial Stability Facility last May – have not yet cost the taxpayer a penny. These are loans backed by guarantees. Once we start resolving the crisis for real, it will get expensive. Greek sovereign debt restructuring will mean big losses for banks and insurance groups. Some of those will ultimately end up with the taxpayer. I would also expect Ireland to be forced into a debt restructuring – at least in respect of senior bank debt – and this too would have costly financial ripple effects throughout Europe. The idea that Greece and Ireland can pay back their debt in full, and on time, is a triumph of hope over everything we know from the history of financial crises.


Genuine crisis resolution is also politically risky. Politicians find it more expedient to talk about competitiveness instead – a subject they know and one that is easier to convey. But their record is not good. Remember the Lisbon agenda, a now defunct intergovernmental effort to boost the EU’s competitiveness? A rise in southern European competitiveness is not something you can agree on over dinner. It will require a massive loss of national sovereignty and deep incisions in national wage bargaining systems.


No country, not even Greece, has yet prepared its public for what would undoubtedly constitute the biggest change in social policy in more than a century.


Even if you accept Angela Merkel’s pact for competitiveness as a pure post-crisis co-ordination programme, it still lacks credibility because it is constructed too much as a German attempt to foist its own social and economic order on to other countries. This is the biggest push of German political hegemony in my lifetime. It is the price the German chancellor commands for her acceptance of an increase in the lending ceiling of the EFSF.


As a quid pro quo, which such deals invariably are, I would ask Germany for more than just a bigger EFSF. Sylvie Goulard, a French liberal member of the European parliament, made the point last week that if Ms Merkel talks about competitiveness, others should have the right to talk about a eurozone bond. I agree. It is surely not an attractive proposition for, say Spain, to have labour laws coming from Berlin, a currency from Frankfurt, but debts remaining in Spain.


I am not sure which crisis Ms Merkel’s resolution mechanism is going to resolve. The one I have been observing for the past year will carry on.


Copyright The Financial Times Limited 2011.