According to Eurointelligence’s morning paper review (shorter version):
“Bundesbank president insists that any bank legacy problems must remain the liability of national regulatory regimes; [he] says anything else – i.e. the explicit commitment by the eurozone summit in June to separate banking and sovereign risks – constituted a financial transfer.”
From the longer version (req login):
“Reuters quotes Weidmann as saying that only those risks that come to exist under common supervision may be supported by shared liability. Legacy problems should need to remain the liability of national regulatory regimes. “Anything else would be a financial transfer and those should be made transparent and not hidden under the cloak of a banking union.” he said. “The primary goal of a banking union cannot be the sharing of risks.””
It’s important, in this context to remember that one of the main functions of the establishment of the Euro was to aid the transfer of financial capital across European borders. This is highlighted in Jean Claude Triche’s 2004 talk in Dublin:
“Finally much progress has been achieved in capital market reforms, not least due to the introduction of the euro. But the further integration of national capital markets towards a truly European financial market could make an even more important contribution to safeguarding against country-specific shocks. (…) In this context, one has to consider the astonishing experience of Ireland, which recovered from poor economic and fiscal conditions in the mid-1980s to an impressive pace of economic activity and sound fiscal position in no more than a decade. In addition to a favourable macroeconomic environment and the benefits derived from participation in the European Union, the economic recovery was grounded on far-reaching home-made structural reforms in the labour, capital and product markets.”
The citing of Ireland as the example of ‘successful’ fiscal consolidation and its so called improvement of labour, capital and product markets is significant. Ireland is the model for European directed monetarism, it hasn’t followed it.
It also highlights the fact that if an economic shock were to occur (and history tells us that the majority of economic shocks are due to a collapse in banking, so if you free up capital markets banks are heading for a fall at some point) the response would not be to put in place a buffer system for dealing with that bank debt, but rather for those countries that are affected to put in place a fiscal consolidation program for further labour, capital and product marketing reforms which had been so successful in Ireland. Of course, we know that success was a myth.
Parallels with the Irish fiscal crisis and austerity measures in the 1980s are of limited value given the different circumstances the Irish economy finds itself in in 2011 and 2012. The 1987 to 1990 consolidation did not coincide with a banking collapse, nor did it coincide with a worldwide credit crunch and a rapid world trade contraction (Ferriter 2005). In the 1987 to 1990 consolidation, only capital expenditure was reduced as a percentage of GNP, current expenditure went largely untouched, and in fact rose in one year. Yet within three budgets, the government managed to reduce the deficit from 11.4% to 2.2%, a considerable feat.
What accounted for this deficit-reduction from €2.7 billion in 1986 to €636 million in 1989. The 1987 to 1990 fiscal consolidation coincided with a period of growth in the international economy, with the presence of fiscal transfers from the European Union, the opening up of the single market, and a well-timed devaluation in August 1986. An income tax amnesty introduced in the January 1988 budget also contributed, yielding at least 2% of GNP more than expected (Kinsella and Leddin, 2010).
Finally, the average industrial wage rose by over 14% in the period 1986-1989, or an annual average of 4.6%. Public sector pay rose by a similar level. These wage increases had a two-?fold effect: they boosted government revenue, and increased economic activity through increased private consumption. Rather than being a role model of expansionary fiscal contraction, the 1986-1990 period looks more like a proto-Keynesian story, where a laggard country converges rapidly to OECD averages of per capita consumption, output, and (real) growth.
The reference to the structural reform of capital markets can be translated using the following quote from L. Randall Wray. It basically means:
“free the banks so that they can blow up, then blow up the government budgets as they try to rescue their banks. In reality, of course, the Irish bail-out was really designed to save the banks of the centre nations — not the periphery. Ireland fell on the sword in perhaps the greatest act of charity ever seen in the history of humanity as it protected German and French and English banks from losses on their lending to Irish banks.”
The liability of the individual states in the event of a banking collaspe was apparent to in 1998
Against the background of this dramatic liberalisation of Europe’s financial markets there is the fact that the regulatory and institutional environment will not be adapted. Prudential control will still be done at the national level. This will handicap the regulators in assessing the risk of the institutions under their jurisdiction. In addition, financial institutions in each country of the euro area will, at least initially, overwhelmingly be national. The German financial markets will be dominated by German financial institutions, the French markets by French institutions, etc. Thus, institutionally the financial markets will still have a substantial domestic segmentation. This will make it difficult to efficiently spread the risk of asymmetric economic shocks, i.e. economic shocks occurring in one country and not in others.
The point, however, was not to spread the risk, as we now know. As Wray points out, these French and German and UK banks have largely been repaid via the bailout for Greece, Ireland, Portugal and soon Spain – note again that the size of Ireland’s bailout corresponds exactly to the current size of the debt accrued in Ireland due to the collapse of the banks – 65bn euros.
So while the money accumulated by European banks and hedge funds through speculation and lent to peripheral economies has been transferred back to French, German and English banks the debt resulting from the foolish speculation remains with the individual states.
It is obvious that a break in the link between sovereign debt and bank debt as a resolution to the crisis which is why it was ‘outlined’ in June, but we now see that any actual move in that direction is being prevented by the so called ‘surplus’ countries, Germany, Netherlands and Finland. But as the largest surplus country, and the main beneficiaries of the establishment of the Euro, Germany are at the forefront of this resistance.
It is this resistance that will lead to the breakup of the Eurozone, and it’s being led by Germany.
As Yanis Varoufakis said a couple of days ago
The very reason this awful Crisis was allowed to go on and on and on is that Germany’s elites have not resolved to bind Germany irreversibly to a re-designed currency union. Indeed, if anything, they are shifting in the opposite direction, especially now that the Bundesbank has become the de facto champion of a Eurozone breakup.