LAS CLASES EXPRIMIDAS (I)

¿SOLUCIONANDO LA CRISIS FINANCIERA Y DE DEUDA EN EUROPA?

This paper examines the policies that have been proposed to solve the financial and sovereign debt crisis in Europe, against the backdrop of what the real underlying problems are: extreme differences in competitiveness; the absence of a growth strategy; sovereign, household and corporate debt at high levels in the very countries that are least competitive; and banks that have become too large, driven by dangerous trends in ‘capital markets banking’. The paper explains how counterparty risk spreads between banks and how the sovereign and banking crises are serving to exacerbate each other. Of all the policies proposed, the paper highlights those that are coherent and the magnitudes involved if the euro is not to fracture.

CONCLUSIONES

Markets believe a fracturing of the euro has a material probability. Investors understand that any country with funding problems leaving the euro would do so to take advantage of converting credit risk into inflation risk – which is easier to manage. A fracturing allows monetisation and at least a potential route to improving competitiveness with less unrest. There are also costs to such a severe turn of events:

• High inflation in any country is costly.

• For Europe and the rest of the world the cost could also be large – not least legal uncertainty about financial contracts in euro; other countries within the eurozone coming under increased pressure; and a weakening of the status of the euro as a global currency.

These issues are very complex and, as a consequence of the monetary union, quite unique to Europe. Policies consistent with a growth strategy and including a proper cleaning up of bank balance sheets, recapitalisation and separation are critical to solving this crisis while maintaining the euro intact. The interim role of the ECB and the EFSF/ESM provides time, but that time needs to be used for thorough structural reform.

Adrian Blundell-Wignall is the Special Advisor to the OECD Secretary General on Financial Markets and Deputy Director of the Directorate for Financial and Enterprise Affairs (DAF)