Germany’s Bundesbank is not afraid of playing the role of bad fairy. Last year it opposed the European Central Bank’s scheme for buying potentially unlimited quantities of sovereign bonds – a promise which ended the hot phase of the euro crisis. Last week, it criticised rules that encourage euro zone banks to load up on their own governments’ debts.
Lehman Brothers’ bankruptcy five years ago crushed the global economy, turfed millions of people out of their jobs and left governments groaning under hefty debt burdens. Since then, policymakers have been beavering away to make sure that a similar calamity never happens again. Measures to address many of the key problems have been taken or are in the works. But if a Lehman went bust today, there would still be havoc.
After six years of crisis, much progress has been made in fixing the financial system. There was, for example, a landmark European Union deal last week to make creditors rather than taxpayers foot the bill for bust banks. But there’s a huge job still to do.
One reason the euro zone is in such a mess is that it hasn’t had the courage to clean up its banks. The United States gave its lenders a proper scrubbing, followed by recapitalisation, in 2009. By contrast, the euro zone engaged in a series of half-hearted stress tests that missed many of the biggest banking problems such as those in Ireland, Spain and Cyprus.
Cyprus is no longer centre stage. Nicosia has agreed a 10 billion euro bailout deal with its euro zone partners and the International Monetary Fund. A visible bank run has been averted by stringent capital controls. International markets, which only ever suffered a mild bout of jitters, have calmed down.
The Cypriot catastrophe shows just how far away the euro zone is from creating its much-touted “banking union”. There was no euro zone supervision of Cyprus’ big banks, no transnational approach to put them into controlled bankruptcy, no common deposit insurance and no flow of bank rescue funds from abroad.
Cyprus’ capital controls are an “omnishambles”. If the Argentine-style “corralito” really can be lifted in seven days, the damage could be contained. But that doesn’t seem credible. Extended controls could spawn bribery, sap confidence, further crush the economy, spread contagion and ultimately lead to the country’s exit from the euro.