Europe’s Financial Wasteland

Written on August 29, 2011 by Ángeles Figueroa-Alcorta in Europe, Foreign Policy, Political Economy

By Howard Davies

“April is the cruelest month,” wrote T.S. Eliot at the beginning of his great poem, “The Waste Land.” But, if Eliot had been a professional investor who had observed European financial markets over the last few years, I am quite certain that his choice would have been August.

In August 2007, the decision by BNP Paribas to close two of its hedge funds exposed to the subprime sector precipitated a liquidity crisis for all European banks during that summer. This year, BNP’s great rival, Société Générale, has been in the spotlight. Its stock fell by more than 14% in one day in mid-August, plumbing depths not seen for two and a half years. Rumors have swirled about a possible downgrade of France’s sovereign debt, accompanied by speculation about the consequences for French banks.

Since the French, of all continental Europeans, most respect the convention that no useful work should be done in the month of August, this is harsh treatment for their bankers. They have not been slow to claim that they are being singled out unfairly.

They have a point. France is not the epicenter of the eurozone crisis. There is much – too much – competition for that position. Greece was an early favorite in the race to claim it, but faced a stiff challenge for a time from Ireland. Portugal made a sprint towards the front, but is now falling back a little, with Spain and Italy moving up. France likes to think that it is at the back of the field, strolling leisurely in lockstep with Germany.

The evolution of the crisis has, however, thrown European banks’ balance sheets into sharp focus. Eurozone governments have proven unwilling, or unable, to produce a solution that persuades markets that they are on top of the problem. It seems inevitable now that either the eurozone will have to contract, with parts of the uncompetitive periphery dropping out, at least for a time, or that member countries’ debts will have to be collectively guaranteed, which implies some form of fiscal union. Nothing less will persuade investors to go near debt issues from the eurozone’s fiscally challenged members.

The political problem is that the second solution cannot yet be sold to German voters, let alone to nationalist fringe parties like France’s National Front and Finland’s True Finns. Perhaps it will be possible to persuade the Germans if the alternative is eurozone collapse, which would put the Deutschemark, or a Northern Euro, in the uncomfortable position that the Swiss franc occupies today – too strong for its own good. But things might have to get worse before the political mood swings. Read more…

As published in www.project-syndicate.org on August 19, 2011.


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