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.
When Mario Draghi was appointed President of the European Central Bank, the German tabloid Bild gave him a Prussian helmet because it admired his Teutonic anti-inflation credentials. The Sun, Bild’s British equivalent, should give him keys to the City of London because of his pro-market credentials.
It is perhaps too much to expect Britain’s Conservative-led government to lead any initiatives on Europe, such is the orgy of self-destruction in the party over whether the UK should stay in the European Union. But, insofar as David Cameron manages to get some respite from the madness, he should launch a strategy to enhance the City of London as Europe’s financial centre.
Can the Italians be serious? That is likely to be the reaction of financial markets and the country’s euro zone partners as they ponder a disastrous election result, which could reignite the euro crisis. More than half of those who voted chose one of two comedians: Beppe Grillo, who really is a stand-up comic; and Silvio Berlusconi, who drove Italy to the edge of the abyss when he was last prime minister in 2011. Both are anti-euro populists.
The UK faces half a decade of limbo-land. David Cameron’s promise of an in/out referendum on Britain’s membership of the European Union by the end-2017— provided he wins the next election – means an extremely long period of uncertainty for business. That will be bad for investment. It also heightens the risk of an eventual “Brexit” – a British exit from Europe – which would be even worse for the economy.
David Cameron is planning a keynote speech on Britain’s relationship with the EU later this month. Here is what the UK prime minister should say.
The euro crisis is forcing euro zone nations to rethink how they wish to run their currency union. It is also forcing European Union countries that don’t use the single currency, such as Britain, to rethink their relationship with Europe.
Conventional wisdom has it that the euro zone needs a banking union to solve its crisis. This is wrong. Not only are there alternatives to an integrated regulatory structure for the zone’s 6,000 banks; centralisation will undermine national sovereignty.
Investors have been obsessed with the notion of “Grexit” – Greece’s exit from the euro. But “Brexit” – Britain’s exit from the European Union – is as likely if not more so. The country has never been at ease with its EU membership. It refused to join its predecessor, the European Economic Community, in 1957; it was then blocked twice from becoming a member by France’s Charles De Gaulle in 1960s; and shortly after it finally entered in 1973, it had a referendum on whether to stay.