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Wednesday, March 02, 2011

Eichengreen: Europe's Banks Are in Far Greater Danger Than People Realize

Spiegel interviews Barry Eichengreen:

'Europe's Banks Are in Far Greater Danger Than People Realize', by Barry Eichengreen, Spiegel: The European Union is hoping that aid to Greece and Ireland combined with closer economic policy coordination will be enough to put an end to the euro crisis. But that's not likely, warns US economist Barry Eichengreen. First and foremost, he says ... Europe needs to help out its ailing banks. ...
SPIEGEL: How much money do the banks need to crisis-proof their balance sheets?
Eichengreen: As a rough estimate, I'd put the costs for recapitalizing the German and French banks at 3 percent of Franco-German gross domestic product. ... There are no cheap solutions. My main concern is that Europe will choose a middle path again, for example by making the interest and terms on loans to Greece and Ireland more tolerable. Europe's leaders wouldn't be wrong in doing that, but it would fall far short of what is needed to save the euro. The result would be more wasted months for Europe. ...
SPIEGEL: Despite the current crisis, the economic fundamentals in the euro zone are still stronger than those on the other side of the Atlantic. Why are bond traders scrutinizing Europe but not the US?
Eichengreen: ...I worry that they will begin to distrust the US soon too. History has shown us that financial crises always happen close to elections. We have an important election coming up in 2012. If we haven't tackled our debt problem by then -- and it looks unlikely that we will -- then we will face serious problems. ...[W]ithout raising taxes, we will not be in a position to balance our budget and pay back debts with interest. But because you can't talk about raising taxes in this country, the US will gamble away investors' trust.
SPIEGEL: Is there any desire in US political circles to do something about this problem? Just last December, President Barack Obama extended the Bush administration's tax cuts to 2012, even though tax cuts for the super-rich do nothing to stimulate the economy.
Eichengreen: You've answered your own question. ... But the government has to find a way to boost the US economy -- to lower unemployment, which is at 9 percent, if nothing else. Equally important would be a clear statement from Obama and Congress about how they plan to tackle the debt problem in the medium-term. But instead of doing that, the administration and Congress have just pushed the problem further into the future -- foolishly to 2012, of all years. Believe me, it will be impossible to talk about this problem in an election year. ...
SPIEGEL: The European Central Bank and the US Federal Reserve are buying government bonds to ... stimulate their economies. Is that really a good idea?
Eichengreen: ...In serious crises like these, central banks suddenly become the only ones that can actually make anything happen. This reveals the shortcomings of politics -- and it causes problems, because the banks start doing things that their mandates don't cover. ...

I thought I was pessimistic.

    Posted by on Wednesday, March 2, 2011 at 09:45 AM in Budget Deficit, Economics, Financial System | Permalink  Comments (6)


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