Sunday, 18 September 2011

crisis - what crisis?

The Mardle joins the Dart at Buckfastleigh and when I'm in Devon, I can watch it from my window as I write. It's a better place to think than Marseille, where the G7 achieved nothing a week ago, or Wroclaw, where Europe's Finance Ministers don't seem to have achieved any more as they wrestle with the European sovereign debt crisis.

If leaders find themselves unable to lead, the least they can do is shut up and keep out of the way. Markets want Europe's leaders to produce a rabbit from a hat and make the crisis go away, and are disappointed when they find that no rabbit materialises. As much as finding a solution, the leaders need to manage expectations until no-one expects a quick fix. But that having been said  -what happens next?

If you assume that there is no appetite either to abandon the euro, or to accelerate creative destruction by hastening Greek default, there are a number of steps that are pretty much inevitable from here. The first is that we will see a battle between the Barroso camp - in favour of Euro-bonds and much closer fiscal integration - and the German camp which knows it cannot deliver that to the German voter. The second is that we will see further attempts to ensure that inadequate liquidity is not what undoes Europe. The move to  expand provision of dollar liquidity through year's end is part of that, and further measures are possible. The ECB really doesn't want to make money cheaper, and the German political elite doesn't want to take on the fiscal burden of the weaker economies, but all agree that blockages in the global flow of money are lethal and should be removed. Thirdly, there will be more moves to re-capitalise Europe's banks, in order to weather-proof them against Greek default. The banks may shout they are adequately capitalised already, and face limited losses anyway, but this is a crisis of confidence. After the excesses of the past, banks are inevitably gong to face excessive regulation, need excess capital and have to adjust their business models accordingly.

With all that will the euro survive? Probably. The euro needs bolstering so that can withstand the default of a member nation. likewise the banking system needs to be able to withstand sovereign default. The tools to do so are available to the ECB and the politicians. I just wish they'd stop going away for crisis talks from which they emerge with no suggestions at all about what to do.

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