The manifesto for a job properly done
Today, the following manifesto appeared in the blog sphere : "In support of a European banking union, done properly - a manifesto by economists in Germany, Austria and Switzerland". For the link, I would like to refer to :
The main message of the authors is quite simple :
In the course of the crisis, fiscal budgets are being tapped to refinance systemically relevant financial institutions. At the same time, financial institutions continue to play a central role in financing national governments, lending money to them and holding their debt. An unavoidable consequence is that bank failures have led to sovereign debt crises and sovereign debt crises have led to banking crises, leading to growing mistrust of both national banking systems and government finance.... Only by breaking the link between the refinancing of banks and the solvency of national governments will it be possible to stabilize the supply of credit in crisis countries. If the refinancing of banks – and the insurance of bank deposits – can be made independent of the financial state of the respective domiciling country, national sovereign crises can be decoupled from the private sector financing. In this way, contractionary demand shocks induced by corrective national fiscal policy can be softened by a broadening of the supply of credit. A European backbone to the refinancing of banks will dampen the impact of the coming fiscal consolidation. An indispensable requirement for this is a set of uniform regulatory banking standards which are implemented by a single European authority.
Now we have on numerous occasions in the past pointed to this and the underlying graphs should give some support to the "Siamese twin" riddle to be solved. And the way we have been proceeding so far is that we seem to have been unable to split the Siamese twins. Or in the case of LTRO, hoping that one positive would automatically lead to another positive. It did but rather sooner than later, markets got back to reality.
The first graph gives you the evolution of the Western Europe sovereign CDS and W-Europe senior financial CDS; From the graph, it's already obvious that both financial indicators move in line with each other. The table underneath just gives you an idea how well the correlation seems to fit (0,8 with a t-test of 28, meaning a highly significant statistic)
Now in the paragraph mentioned above, I deliberately underlined the last sentence : It requires a pan-European approach. And throughout the entire manifesto, it is quite clear that the motto seems to be deeper financial integration, more supra-national powers in order to break the vicious financial circle or negative feedback loops. The authors conclude that
A monetary union with free capital flows cannot work reasonably without a unified banking framework. For this reason, the decisions of the last EU summit represent a move in the right direction. Now it is crucial to implement these decisions, in order to create a durable solution with uniform European structures
Now this is really no hanky-panky, this is straightforward logic. It's a simple and bold prescription of "no monetary union without a political and policy union a priori". The only thing which bothers me in the current political debate, is the fact that virtually nobody seems to understand the full extend of this. For politics, it seems to be business as usual à la carte. And without being prejudiced, I simply give the example of how for example the so called "left" approach or philosophy seems to work these days (contradictions on the right can be found as well, I know and we are all human after all) : On the one hand they plea for more Europe and unification in the field of tackling fiscal fraud, banking regulation, in the field of labor market, social issues, solidarity and jointly issued eurobonds etc. And on some of these subjects and after what happened in the wake of 2008, they have a point. On the other hand, when Europe gives clear recommendations on reforms and budgetary issues, some simply ignore this by saying Europe has no business with domestic issues of this kind. Well, it doesn't take a genius to understand why we are not on course yet in solving the present Siamese riddle. In the end, reshuffling of the deck chairs didn't stop the Titanic from going down.