Many fingers have been pointed in the midst of the European financial crisis, but one culprit stands out above them all.
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Who is to blame for the financial crisis engulfing Europe – and possibly the world? The frivolous Greeks? The dithering politicians? The hubristic architects of Europe's single currency? All these actors have played a part, but the main culprits – as with the U.S.’s financial meltdown three years ago – are surely the banks.
Somehow, this story has morphed into a morality tale about the folly of the European Union and the bankruptcy of social democracy. This is blaming the victim for the crime. Yes, Greece borrowed beyond its means, as did the governments of Portugal, Italy, and others. Yes, its over-generous welfare state – and sieve-like tax system – was unsustainable. And yes, the single currency led Greece, like other euro-zone members, to believe it could borrow endlessly on the same market terms as Germany.
But the real cause of Europe's financial crisis is not government, socialism, or the false security of the euro zone – it’s the banks that lent so recklessly and lavishly to overstretched governments, and now find themselves facing insurmountable losses if (or, rather, when) Greece and others default. Focusing on Greece’s failure to borrow prudently misses the banks’ much bigger, and systemically critical, failure to lend prudently – and to recognize the risks of Greek debt (even when denominated in euros), given Greece's record of serial financial crises since 1945.
The failure was spectacular. By some estimates, Europe's banks are in worse shape than those of the United States. According to The Wall Street Journal, the total debt of the three main U.S. banks (Bank of America, JP Morgan, and Citigroup) is $5.86 trillion, or 39 per cent of the country’s gross domestic product, while the debts of France's giants (BNP, Crédit Agricole, and Société General) amount to 4.7 trillion euros, or 250 per cent of France’s GDP – a suicidal level of exposure concealed, up until now, by regulators apparently more focused on protecting the incestuous network of bankers, bureaucrats, and politicians that dominate French finance than shedding light on the poor health of the financial system.
This threat of a banking collapse – and an implosion of the financial system – is the gun being held at European governments and taxpayers. The debate is no longer about how Greece will repay or whether it will default – clearly, little more can be squeezed out of Greece. Instead, it is now about who will pick up the tab for the banks' blunders.
Many blame the euro “straight jacket” for the crisis, arguing that it prevents Greece from devaluing its ways to economic health. But how would returning to a drastically devalued drachma improve banks' balance sheets, the core of the problem? Devaluation is just default by another name. Others point the finger at the EU, arguing that its rambling, decentralized structure has made policy co-ordination difficult and left no one institution in charge. But how would dismantling the EU – disintegrating Europe – improve co-ordination and efficiency? Back-to-the-future proposals are a recipe for even more chaos.
Besides, these debates obscure the real question: What are we to do about the banks, the Achilles’ heel of globalization? Despite Basel III, despite G20 pledges, and despite promised domestic reform, we still find ourselves in a world where spectacularly ill-judged decisions by too-big-to-fail banks threaten to bring the world financial system to its knees – and to unravel not just European, but global integration.
Thomas Jefferson supposedly claimed that "banking institutions are more dangerous to our liberties than standing armies." As the global economy stumbles again – for the second time in just three years – it's hard not to be reminded of his warning.
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Source: the Mark
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