Monday, November 22, 2010

European meltdown?

Last week I did a talk for the second time on the European Financial crisis.  Each time I do this talk something nasty seems to happen afterwards. This time it is Irish banks and the impending bailout for the Irish government - last time it was Greece and it's bond market crisis and then the subsequent bailout.  In Europe the din from the masses is increasingly talking of doom and gloom with contagion to Portugal and Spain hitting the financial headlines. Even respected FT commentators are now "twittering" about the demise of the euro (see Gideon Rachman at and Samuel Brittan at 

This is dangerous stuff, as the demise of the euro would indeed have far-reaching consequences way beyond Europe. The ramifications of the most successful example of economic integration to date failing because of market forces and contagion would have global consequences way beyond Europe. The prospects of further Asian economic integration would likely be dashed, and monetary integration that is supposed to occur in South America and Africa would quietly be dropped. Not only that, but the critics of market forces stopping governments ( - who are after all democratically elected) from achieving regional integration objectives would likely spark a big backlash against the financial markets in continental Europe. The British, on the other hand, would likely be thanking their lucky stars that they never took the plunge and joined the euro in the first place.

But despite all the hubris and chatter, there are several important points that the mainstream media appeared to have missed when reporting on Greece and Ireland.  The first is that these are small countries, and that the euro area will remain intact while some countries might decide that it is in their best interest to leave.  As long as these are only small players the euro will likely survive. The second point (outlined in David Mayes's excellent piece on banking regulation that was recently in a review that I edited - now published online at is that with a single market in financial services there is an urgent need for banking regulation at a supranational level.  Hopefully EU member state countries will accept the transference of sovereignty in this area to a supranational banking regulator in the not-too-distant future.  The Irish crisis could easily have been averted had this already been in place.  The third is that given the crisis in public finances within Europe, there will hopefully be some agreement on transference of sovereignty in fiscal matters to the supranational level (just among the euro area member states?) perhaps in the same way that Australia has centralized it's debt issuance for it's states.  The fourth, and probably most important point is that it is in noone's interest to see this crisis spread through contagion as it will affect banks in all member states giving rise to even more problems with public finances throughout the euro area, so that action will likely be much more likely now that European leaders have seen the effects of papering over problems with the Stability and Growth pact or allowing inertia to set in in the ongoing evolution of economic integration within Europe. 

As Jean Monnet, one of the founding fathers of the European Union once said "People only accept change when they are faced with necessity, and only recognize necessity when a crisis is upon them."

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