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Wednesday, September 24, 2008

We hate to say told you so

Every crisis is an opportunity for the those who believe in the project of "ever closer union".

So it's no surprise to see in the FT today - that the inevitable is finally starting to happen in euroland:

The crucial problem on this side of the Atlantic is that the largest European banks have become not only too big to fail, but also too big to be saved. For example, the total liabilities of Deutsche Bank (leverage ratio over 50!) amount to about €2,000bn (more than Fannie Mae) or more than 80 per cent of the gross domestic product of Germany. This is simply too much for the Bundesbank or even the German state, given that the German budget is bound by the rules of the European Union’s stability pact and the German government cannot order (unlike the US Treasury) its central bank to issue more currency. Similarly, the total liabilities of Barclays of around £1,300bn (leverage ratio 60!) are roughly equivalent to the GDP of the UK. Fortis bank has a leverage ratio of “only” 33, but its liabilities are three times the GDP of its home country of Belgium.

With banks that have outgrown their home turf, national treasuries and regulators in Europe are living on borrowed time: they cannot simply develop “road maps” (the only result of various Ecofin discussions of regulatory reform by finance ministers), but must contemplate a worst-case scenario.

Given that solutions for the largest institutions can no longer be found at the national level it is apparent that the European Central Bank will need to be put in charge as it is the only institution that can issue unlimited amounts of a global reserve currency. The authorities in the UK and Switzerland – which cannot rely on the ECB – can only pray that no accident happens to the giants they have in their own garden.

So the ECB finally gets put in charge of financial regulation/supervision. Quelle surprise.

The only weak step in the argument is the last one - about being able to print money in a "reserve currency" - what exactly are they sayingthe threshold is here?

(a) Both GPB and CHF are reserve currencies in proportion to the size of their economies - and (b) why does that even matter?

The point is to have the option not excercise it. Yes, the UK is a more open economy than the eurozone taken in aggregate. But mass "printing of money" whatever that means would still cause inflation in the Eurozone. Arguably the UK and Swiss have greater flexibility here because they have freedom of action - it is not clear under which circumstances the ECB could start "printing money" - i.e. changing its rules and targets.

The UK and the Swiss authorities at least have the option of coordinating their fiscal and monetary policies, whereas the members of the eurozone will shortly being having some "interesting" discussions as the interests and policies of different member states diverge more and more, the rules are broken further, and the ECB tries to square the circle. Good luck with that.


Martin Cole said...

This is all very odd. Yesterday on my blog "Ironies Too" I posted some quotes and a link to Resource Investor, including this:

"The key problem on this side of the Atlantic is that the largest European banks have become not only too big to fail but also too big to be saved. For example, the total liabilities of Deutsche Bank (leverage ratio over 50!) amount to around 2,000 billion euroetc.etc."

So I linked to the FT of today via your post and was asked for cash to view their crib! I cannot therefore check if your quote was correctly sourced in the online or print edition - if not this is pure plagiarism (as one might expect from such a pro-EU publication!)

Another point while I am on it, why do you never acknowledge my blogs existence, particularly as I have been actively blogging against the EU since February 2003! Even the BBC linked me top of their link list yesterday in connection with Darling's interview on the Today programme? (Albeit the post was on Curing Britain's Property Price Crash'rather than the EU).

Open Europe blog team said...

Happy to put you on our blog roll - we'll do it now

Martin Cole said...

Thanks! And the FT quote that I had linked on Tuesday from Resource Investor, did they pluck it from the FT without acknowledgment.

Ambrose Evans-Pritchard today has some of it in his column and it is cropping up elsewhere on the internet.