In Bolstering Euro, EU Should Concentrate on Banks, Not on National Bail-Outs (3/04)     Print

Ahead of two summit meetings this month to bolster EU economic governance and strengthen confidence in the euro, attention has focused mainly on greater fiscal discipline by member states. An alternative insight – that the most immediate danger lies in under-capitalized banks in many eurozone countries – comes from U.S. economist Barry Eichengreen, a professor at University of California, Berkeley, who has followed the single currency closely for a long time.

His theme, explained in an interview with Germany’s Spiegel magazine, is that EU member states need to switch strategies in their bid to stabilize the eurozone.

“At their summit in March, the member states [must] face up to some unpleasant truths. Plan A has failed. Now they have to switch to Plan B. They must stop attempting to combat the crisis in Greece and Ireland by forcing these countries to pile more debt onto their existing debts by saddling them with overpriced loans…Essentially, all Germany and France want to achieve with these measures is to protect their own banks from collapsing. Now people are beginning to realize that there is no way around rescheduling Greece's debt -- and that will also involve the banks. For this to happen, there is only one solution: Europe needs to strengthen its banks! Greece lived beyond its means, but in Ireland and Spain it is the banks that are the problem. The euro crisis is first and foremost a banking crisis...[Politically,] it will probably be easier for Chancellor Angela Merkel to persuade German taxpayers to save their own banks than to fork out billions for Greece again. Especially since, with a haircut on Greek debt and measures to strengthen banks, it should be possible to draw a line under the crisis -- and preventing it from spreading to Spain."