Imbalances in the Euro Area Post author By Philip Lane Post date February 15, 2011 Lorenzo Bini-Smaghi continues his sequence of speeches that are relevant to Ireland – available here. Categories In EMU Tags euro imbalances 7 Comments on Imbalances in the Euro Area ← UK Economic Policy → Lucey: Time for Debt Write-Down 7 replies on “Imbalances in the Euro Area” It’s a better piece, but it is still not good. “The surge in lending activities and risk-taking by banks was facilitated by a sharp increase in cross-border banking flows, as the deepening of financial integration led banks to search for profitable investment in high-growth countries. And national regulators did not step in forcefully to curb excessive risk-taking in banks.” See, this bit correctly identified excessive cross-border capital flows facilitated by a single European market for financial services (effectively for credit). Many of these flows were into the eurozone from either other EEA members or from international capital. The solution? So there’s all this international and cross-border stuff going on and the solution seems to be National Central Banks… it makes no logical sense, never mind economic or financial sense. I really doubt that an NCB instituting capital controls, in the way they were instituted in Brazil for example, would be possible or even legal in the single market. Can you imagine the uproar if the ICB had instituted a tax on capital coming in from BoSI and Halifax? Or on interbank borrowing from German or Dutch banks? It seems to me that the ECB is tieing itself in knots in an attempt to avoid taking on the stiffer regulatory function that integrated financial markets demand. “This crisis was not our fault, we’re going to bloody make sure the next one isn’t either”. @Lorenzo I speak as an Irisman and a citizen of Europe. Lorenzo, you must have gone to Speksavers! Lots of useful stuff – and most points on local governance accepted – but you make one major flawed assumption and you fail to address the issue of who is responsible for monitoring capital flows to dodgy-banks. The flawed assumption, is that ‘taxpayers’ i.e. European citizens, are liable for picking up ALL debts of ‘dodgy over-extended banks’; this is more of the Conflationist Fallacy writ Large – where is Capitalism here – if banks fail – Let them. Second is linked – these ‘dodgy over-extended’ banks obtained funding via ‘Capital Flows’ from those with an excess in other regions of Europe and beyond. Those in financial system originating these flows, according to your logic, are to be fully protected by citizen-serf-taxpayers!!!! This is not the European Project – from citizen-serf perspective – this is IMMORAL HAZARD writ Large. Lorenzo, who is responsible for monitoring Dangerous Capital Flows ….? Is Europe to be run for the sole benefit of the Financial System? You address efficiency and stability but “omit equity, which has a deeper political connotation and may be less relevant for the sustainability of a monetary union.” As Foucault put it – ‘ … those that from a long ways off look like flies ..’ – ordinary European citizens – don’t appear to matter! These are real live human beings, and they did not enter the EU to become socialized-slaves to the financial system. @hoganmahew … just got to your post now … after wading through Lorenzo seeking some ‘light’ …. and you are much more savvy on this stuff than I am …. Savvy? no! Not even canny! And youu make the point better than I do. It is a glaring hole in LBS’s argument and plan. In Titanic terms, it is putting radar operators in every cabin, but not installing a radar… @hoganmahew .. what was it again that Kutz McCarthy said to Lewis about a little man in charge of the money in Dublin … or was it Frankfurt? (-; … and I’m pickin up me mackro via this blog and the everyday …. @hoganmahew OK Be gentle with me (only learning!), I read the LBS piece and spotted the assumption about taxpayers paying for the debts of the dodgy banks. So, does this not mean that Brian Lucy was right about it being time for “Europe” to make a political decision that write-downs are necessary. And that Colm McCarthy was right that it’s time to properly stress test the banks, distribute the losses and re-capitalise the (saveable) banks? Would this not be capitalism working as it should work? And should this not be Ireland’s negotiating position? @Richard Fedigan “So, does this not mean that Brian Lucy was right about it being time for “Europe” to make a political decision that write-downs are necessary.” Maybe. Certainly they need to put in place a mechanism and institutions that explicitly state how bank resolution on a pan-european basis will happen and how it will be paid for. Plus the institutions to make sure it is rarely needed. (That would be an FDIC-style operaion for resolution and a super regulator for cross-border capital flows). “And that Colm McCarthy was right that it’s time to properly stress test the banks, distribute the losses and re-capitalise the (saveable) banks?” Absolutely. It was time to do that in 2009… it is never too late to do the right thing… but see above about what is required. In particular, who pays? (Personally, I think levying banking systems now (Tobin-tax style) will allow for the issue of bonds that can be used for whatever resolution is desired). “Would this not be capitalism working as it should work” A missing element is “sell the assets”. Firesales are despised, but they are also required, particularly when a bubble has been particularly large (and we are not the only large bubble in Europe, just the largest…). “And should this not be Ireland’s negotiating position?” Yes; our position should be that this is a financial problem separate to the fiscal problems of the structural deficit. It should not be possible for a national banking system to become systemic to the ESCB, however badly run it is. The FIRE economy is a bust. Other banking systems are in trouble. The fallout will be large. Unfettered movement of cross-border capital flows can be damaging. Not all these issues refer solely to Ireland, we just have them in spades. Comments are closed.