Wednesday, June 13, 2012

Europe: Finding the Road Map

The Lehmann Letter (SM)

The news from Europe – and around the world - is so gloomy that it’s difficult to find an upbeat article in the morning newspapers.
One problem: The roadmaps showing the way out of crisis are long term, while there is no clear short-term route.
See, for instance, the following story in today’s New York Times:
“European Central Bank Endorses a Banking Union”
Here are the opening paragraphs:
“The European Central Bank called on Tuesday for euro zone leaders to form a “banking union” to oversee its big banks, a move that would help shield countries and their taxpayers from the misfortunes of their troubled lenders.
“A banking union might address one of the causes of the euro crisis: the tendency for sick banks to undermine entire countries. The costs of taxpayer-financed bailouts in Ireland and Spain, among other countries, were so large that they raised questions about the creditworthiness of national governments.
“Such a union would also allow euro zone countries to share the financial burden of banking crises, perhaps avoiding a repeat of Spain’s woes caused by Bankia and other ailing lenders.
“In a report issued Tuesday, the central bank said it envisioned that euro zone countries would share responsibility for regulating big banks and for managing a common deposit insurance fund. Countries would also create procedures for winding down terminally ill banks so taxpayers would not have to bear the cost, the bank said.”
That looks so good it raises the key question: “When?”
The article continues by saying that such a union must await the future and would require several years to implement. But it does tie in well with German Chancellor Angela Merkel’s insistence that the solution for Europe is, “More Europe.” By that she means that Europe must bind itself more closely together, going beyond a common currency and a common banking system. Europe must create a fiscal union with central authority over government taxing and spending decisions. In other words: A United States of Europe.
If that is the long-run solution – and this letter believes it is – then how does Europe survive the short-term crises now confronting it? What is - where is - the roadmap? There was, unfortunately, nothing in today’s paper that made this clear.
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© 2012 Michael B. Lehmann

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