Europe must seize the chance to fix the euro

Date: 01-06-2017
Source: The Economist: Charlemagne

An improving economy and Emmanuel Macron’s election are an opportunity that may not come twice

PICK a note, any note. The bills of Europe’s single currency are adorned with handsome bridges, arches, vaults and aqueducts, testament to the glorious architectural history of the old continent. True, the constructions are a little lacking in character; the notes’ designers were told to depict generic examples rather than specific structures to avoid offending countries whose splendours might be overlooked. But they speak of strength, sturdiness and the confidence of what some used to believe might be the world’s next reserve currency.

The euro itself, though, remains a wobbly, half-built enterprise, desperately unprepared for the next shock. When Europe caught America’s flu after 2008, bond markets picked off the euro’s weakest members one by one. Greece, Portugal, Ireland and Spain were forced into bail-outs. Italy, the euro’s third largest economy, tottered. Emergency funds were created, the European Central Bank implied it would create unlimited quantities of cash if needed, and the euro limped on. Today, growth is picking up and unemployment falling. But no one believes that the euro, which lacks the political and fiscal institutions typical of a currency area, can remain half-built forever. Investors are uncertain of its future, and governments have piled on debt since the last crisis, shrinking the space available to respond to the next one.

Vive l’Euro?

Lucrezia Reichlin

Lucrezia Reichlin, a former director of research at the European Central Bank, is Professor of Economics at the London Business School.

JUN 1, 2017 Project Syndicate

LONDON – Emmanuel Macron’s victory in the French presidential election on May 7 triggered a surge of optimism about the future of the European Union, and the eurozone in particular. This is partly because Macron ran an unambiguously pro-EU campaign, and was rewarded for it. But it is also because the threat of a populist government in one of the EU’s founding states is, for the moment at least, a thing of the past.

Yet renewed EU enthusiasm should not be mistaken for unwavering confidence. As Macron himself surely understands, the EU’s long-term viability requires that the “European project” appeal to its citizens more than its leadership. EU leaders therefore must – and probably will – take this opportunity to revitalize efforts to address security, migration, and growth challenges.

New ICMB/CEPR Report: Bail-ins and Bank Resolution in Europe

Thomas Philippon, Aude Salord

Thomas Philippon

Professor of Finance, Stern School of Business, NYU and CEPR Research Affiliate

Aude Salord

Droit & Croissance

 

22 March 2017, voxeu

Failed financial firms should not be bailed out by the taxpayers. Europe, unfortunately, has a weak track record of following this principle of good governance and sound economic policy. The banking union, with its new approach to supervision and resolution, is meant to improve this matter. This column introduces a new Geneva Special Report on the World Economy which reviews the resolution side of the banking union.

Nine years since the Global Crisis of 2008 and two and a half years after the launch the banking union in November 2014, some European countries are still struggling with significant banking problems. The total amount of non-performing loans (NPLs) in the EU is around €1 trillion and its allocation is far from equal. The rates of non-performance range from less than 5% in strong countries to 16% in Italy, 20% in Portugal, and 45% in Greece and Cyprus (EBA 2016). More than a third of EU countries have NPL ratios above 10%. These non-performing legacy assets present a challenge for the newly created banking union.

This column introduces the 4th Special Report in the Geneva Reports on the World Economy series.

The Eurozone is Still Vulnerable

Benedicta Marzinotto

Benedicta Marzinotto is Lecturer in Political Economy at the University of Udine and Fellow at Large at Bruegel.

MAR 22, 2017 Project Syndicate

BRUSSELS – Despite recently experiencing an overall economic uptick, the eurozone remains fragile and uninsured against the risk of another crisis. And a major reason is that it is still vulnerable to asymmetric boom-and-bust cycles.

Simply put, while all eurozone members can benefit during good times, some suffer far more than others during busts. This means that whenever the next crisis hits, safety-conscious investors will flee from fiscally weak countries toward fiscally strong ones that have a proven track record of generating economic growth.

When the economic calculus reverses, we can expect to experience a sense of déjà vu. Each country’s gain will entail another country’s loss, which will undermine inter-eurozone cooperation and fuel political tensions. The effects will likely reverberate through each country’s domestic politics, strengthening forces that favor disintegration.

Defending the Euro Starts With Cleaning Up the Banks

Date: 28-02-2017
Source: The Wall Street Journal

Why European bad loans are more than just an economic burden

The European Central Bank is preparing to give eurozone lenders final guidance  on how to manage bad loans.

Fix Europe’s bad debts and you can start fixing Europe.

That is the bigger imperative as the European Central Bank gets set finally to push the Continent’s lenders to clean up their combined €1 trillion bad-debt pile.

Across the EU, bad debts average more than 5% of total loans, according to the European Banking Authority, which is almost three times the level of the U.S. or Japan, according to World Bank data. In some countries, they threaten financial stability: Italy, with more than €200 billion of duff loans, is the well-known standout.

The Financial Education of the Eurozone

Christopher Smart

Christopher Smart, a senior fellow at the Mossavar-Rahmani Center for Business at Harvard University’s Kennedy School of Government, was Special Assistant to the president for International Economics, Trade and Investment (2013-15) and Deputy Assistant Secretary of Treasury for Europe and Eurasia (2009-13). He is also Whitehead Senior Fellow at Chatham House.

FEB 14, 2017 Project Syndicate

LONDON – In 2017, Europe’s leaders will confront an array of severe tests, including tumultuous elections featuring populist insurgencies, complex negotiations over Britain’s departure from the European Union, and a new American president who thinks that the transatlantic alliance is “obsolete.”

But, despite these challenges, EU leaders will also have an opportunity to strengthen their battered union and reinforce its institutions. In particular, they should focus on restoring the banking sector’s credibility, by providing it with more capital and better oversight. Even if they make progress on nothing else, achieving this goal could turn 2017 into a very good year after all.

Europe’s banks have long been central to the continent’s economy. In France and Germany, bank assets amount to 350-400% of GDP, whereas in the United States, they are equal to just over 100% of GDP. After the 2008 financial crisis, the eurozone’s weakest banks quickly buckled under the weight of their bad loans, and then threatened to drag their respective governments down with them. With many countries’ creditworthiness in doubt, even strong banks were caught in a “doom loop,” as they suffered losses from the collapsing sovereign debt on their books.

The Art of European Integration

Sergei Guriev

Sergei Guriev is Chief Economist at the European Bank for Reconstruction and Development.

FEB 6, 2017 Project Syndicate

LONDON – The past year has been full of watershed developments. Aside from Donald Trump’s victory in the United States’ presidential election, some of the European Union’s weaknesses were fully revealed, with the United Kingdom’s vote to leave casting the bloc in a particularly harsh light. But Brexit does not have to spell the Union’s demise. Instead, it can serve as a wake-up call, spurring action to address the EU’s problems.

Some European leaders are attempting to heed that call, by urging EU member states to “complete the Union.” Without the UK, they argue, it will be easier to advance integration, as the remaining members are somewhat less heterogeneous, and therefore more likely to agree on steps that Britain might have opposed.

One such step – and a constant focus of attention since the euro crisis began – is a banking union. While substantial progress has already been made on this front, European banking integration is far from complete. Unfinished business includes a deposit-insurance scheme, as well as the creation of a senior tranche of safe sovereign assets, or eurozone-wide risk-free securities.

Das sizilianische Mutterl und die Bankenrettung

27.12.2016 | 18:27 | Josef Urschitz (Die Presse)

Italien spielt bei der Bankensanierung die Tränendrüsenkarte aus.

Ups: die italienische Pleitebank Monte dei Paschi braucht plötzlich nicht, wie bisher geglaubt, fünf, sondern 8,8 Mrd. Euro, davon 6,5 Milliarden vom Staat. Kein Problem, Bankbilanzierung ist ja keine exakte Wissenschaft. Und etwas mehr wird es wohl auch noch werden. Das haben Kapitallöcher bei Banken im Abwärtsstrudel so an sich.

Dass mit der Staatshilfe das gemeinsam beschlossene Bail-in-Gebot der EU gleich beim ersten Anlassfall gebrochen wird, wundert eigentlich auch niemanden. Wir haben an dieser Stelle ja schon festgestellt, dass die konsequente Nichteinhaltung der eigenen Regeln einer der Hauptgründe dafür sein wird, dass die EU in dieser Form nicht überlebt.

Allerdings hat die italienische Regierung ihre Bankenrettung sehr geschickt auf den Weg gebracht. Mithilfe der emotionalen Karte und starker Tränendrüsenmassage: Viele Kleinanleger hätten nachrangige Bankanleihen gezeichnet, es gehe also weniger um die Rettung einer Großbank als um die Rettung „vieler kleiner Sparer“. Das sitzt: Wer will schon dem armen sizilianischen Mutterl, das mit nachrangigen Monte-dei-Paschi-Anleihen auf die Heiratsausstattung der Enkel anspart, Geld wegnehmen?

Will Europe Let Germany Lead?

Marcel Fratzscher

Marcel Fratzscher, a former head of International Policy Analysis at the European Central Bank, is Committee Chairman and President of the think tank DIW Berlin.

DEC 27, 2016 Project Syndicate

BERLIN – The United Kingdom’s Brexit vote, Italian Prime Minister Matteo Renzi’s referendum defeat and subsequent resignation, and Donald Trump’s election as President of the United States have created a power vacuum in the West, and in Europe. At a time when Europe needs to make important collective economic and foreign-policy decisions, domestic issues are preoccupying larger European Union member states such as France, the UK, Spain, and Italy. Consequently, there is growing pressure on German Chancellor Angela Merkel and her government to step up and lead.

But while Germany wants to show leadership, it needs European partners who are willing to engage and compromise. Germany’s critics are right to say that it could be more open to other member states’ policy proposals, but many of the complaints leveled against Germany have been unfair – and often self-serving.

Warum die EU so sicher keine Zukunft hat

20.12.2016 | 18:25 | Josef Urschitz (Die Presse)

Bankenrettung: Schon wieder eine EU-Regel beim ersten Anwendungsfall gebrochen.

Anfang dieses Jahres ist EU-weit eine sehr sinnvolle Richtlinie in Kraft getreten: Bei Bankpleiten sollen künftig nicht mehr automatisch unbeteiligte Steuerzahler die Rechnung für die Aktionäre begleichen (Bail-out). Geht ein Geldinstitut über den Jordan, dann sollen vielmehr (in dieser Reihenfolge) Aktionäre, Anleiheninhaber und Einlagenbesitzer über 100.000 Euro zur Kasse gebeten werden (Bail-in). Der Steuerzahler käme als Letzter in dieser Reihe nur noch zum Handkuss, wenn das nicht reicht.

Das ist gut, weil es den in der Finanzwirtschaft weit verbreiteten Moral Hazard nicht mehr begünstigt. Dieser hat sich wegen der praktizierten speziellen Form des Bankensozialismus im vergangenen Jahrzehnt seuchenartig ausgebreitet: Verluste wurden ausnahmslos vergesellschaftet. Wurde eine Bank an die Wand gefahren, dann war das Schlimmste, das einem Bankmanager passieren konnte, ein fetter Golden Handshake. Aktionäre und Bondholder mussten auch nicht lang darüber nachdenken, wem sie da Geld geliehen hatten, denn die Rechnung ging am Ende jedenfalls an den Staat. Entsprechend sah das Risikoverhalten der Branche aus.