Guest post. Translated from the French by Tim Gupwell.
In the blink of an eye, discussions have switched focus. The issue of growth which was at the forefront has rapidly surrendered its place to the elaboration of a plan for the supervision of the banks and the rescue of those in need. Improvisation continues to be a dominating force, with what was denied yesterday becoming a priority today.
The sheer size of the reported losses in the Spanish banking system and the capital withdrawals out of struggling countries have forcibly imposed this return to a theme which had been set aside. The global fragility of a highly interconnected system has been highlighted to such an extent that, in order to show the potential scale of it, the risk of a new European ‘Lehman Brothers’ scenario has been evoked. A new aspect, the chronic under-funding of the system, which had for a long time been denied and described in a relatively harmless and indulgent manner as a ‘liquidity crisis’, has now been fully recognized, at least for those cases which can no longer kept out of the public eye.
The reinforcement of minimum capital requirements by the European Banking Authority (EBA) – already considered insufficient even before they have been put into practice by all the banks concerned (clear to see from the example of the Spanish banks) – has been a belated first sign of the realization of this necessity. Meanwhile, while all this has been going on, the banking lobbies have been doing their utmost to hide the reality, seeking to modify the Basel III capital proposals in ways that benefit them, and to drag out the work on accounting norms by the International Accounting Standards Board (IASB). But all this is no longer enough.
Massive capital injections by the ECB have merely bought some more time. European banks, faced with difficulties meeting their capital requirements, or not wishing to pay too high a price to do so, have had to bite the bullet anyway by actively selling off their assets in order to reduce the size of their balance sheets. In order to consolidate the edifice, a public intervention has once again become necessary, although this may be partially glazed over by the unveiling of a new banking tax (which will not be sufficient to cover the financing needs). In other words, here we go again.
After the initial request that financial aid does not pass though state budgets so as not to worsen the deficits, the discussion has quickly been extended to the proposal of a ‘banking union’, drawn up under the auspices of the community, and itself enshrined in a far broader set of measures which include budgetary and political aspects, and deal with growth. Then, under pressure from the German government, the focus has been quickly switched to the order and the timetabling of its implementation.
The German government fears that the measures of support for the banks are the equivalent of introducing, via the back door, a pooling of risks which they had already refused through the front door. It has therefore required that an overarching set of measures should be set in stone beforehand, ensuring as a matter of priority their strategy of budgetary control, and thus assuring them of a de facto mastery of the situation. They would extend over several years the process which can best be summarized as creating “more Europe”, so as not to end up being dragged down by everyone else. All the more so, since the German banks refuse to engage in any kind of logic that would require them to support their struggling European competitors (as they describe them), and make this known loud and clearly.
The German leaders also consider that the other measures proposed, starting with direct financing of the banks, will necessarily lead to the financial involvement of the ECB, the supreme taboo! In which respect they are, moreover, not entirely mistaken when all is said and done.
Faced with the risk of these discussions getting bogged down and dragging on when immediate action is required, a G7 of finance ministers has been organized this Tuesday morning by telephone, an expression of the impatience manifested the day before by a senior member of the American Treasury department, who according to the Wall Street Journal, stressed that they “hoped to see the Europeans act quickly and decisively over the coming weeks”. Nevertheless, Wolfang Schäuble, the German finance minister reaffirmed the following morning in an interview at Handelsblatt that it was necessary to “move forward one step at a time”, insisting once again on the ‘difficult road’ that Spain needs to take.
The Spanish budget minister, Cristobal Montero, saw things differently on Spanish radio station, pinning all his hopes on the rapid adoption of a mechanism for European integration which would allow Spain to avoid the classic bailout packages – the fate reserved for their beneficiaries speaking for itself. Meanwhile, the rumours of a new plan for Portugal are becoming more and more insistent, as was formerly the case for Greece and, as will be the case in future for Ireland.
With his back against the wall, the minister did however evoke one heavy-weight argument, at a time when all the European governments reaffirm gravely that it is up to Spain to decide whether to ask for a rescue package, and that it is out of the question to put any pressure on it to do so. Technically, he explained eruditely, the country cannot be the object of a bail-out package, alluding to the size of the country and letting it be understood that it is not within the capacity of the existing European mechanisms. This is something which is patently true in the short term.
It could also prove to be the case in the medium term, if others agree with the opinion of Jim Flaherty, the Canadian finance minister. He has just re-affirmed the fierce opposition of his government to any financial intervention by the IMF in Europe, and considers that the Europeans have the capacity to solve their problems on their own.
Can one be so sure?