Crisis Returns to the Banking Sector

Falling unemployment numbers are more important in the United States than in Europe; the U.S. system offers less protection for employees. It is particularly so right now, when even the Republicans realize that the “social elevator” is broken, which means America is no longer the country where a poor person who works hard can become rich. This makes Barack Obama happy, since the falling unemployment rate gives him more hope to be re-elected. However, in all the stock markets of the world that piece of news is not sufficient to thwart European pessimism. There will need to be other signs to be sure that the recovery is robust.

If the recession Europe is facing is short-lived, as the recent data of real economy leads us to believe, its repercussions across the Atlantic will be limited. What about the banks? If there’s an international contagion, it will travel fast through them. Besides, the crisis in the eurozone now traps the states and the banks in a vicious cycle. The fragility of the debt in certain countries raises doubts not only about banks located there but also about almost all the other banks in the area. However, it is not a bad thing if the financial crisis returns to where it began. If so, this might help us to understand its origin and hopefully be quicker at finding remedies. Unfortunately, Italy suffered a hard blow, because bankers had not misbehaved much until 2007. Yet, there is a problem specific to this nation which is clear: The structure of ownership. This is based on the Foundations, which one used to go to when the banks were privatized in the ’90s. There is no point in blaming the new European regulations; there really is a lack of capital. It is not a bad thing either if the crisis returns and hits banks; it will show how the difficulties affect the whole eurozone and therefore require a common effort. The nationalization of what remains of Dexia could give a final hit to the AAA rating of the French debt. The French government denies it will happen and yet the rumor keeps on spreading. Germany itself might have to intervene and pull out all the stops.

In short, if banks are unstable, only governments can support them. But what will happen to countries that are too weak to give support? Even banks demonstrate a certain degree of shortsightedness toward the established national powers of the eurozone. To work well, the single currency not only requires a partial end of sovereignty (i.e. a common fiscal policy) but also a banking system as transnational as possible. For instance, it is normal for several of the 50 states in America to consume more than they produce and for others to do the opposite; but the economy is transferred from where it was created to where it is used mostly within one unified banking system, without any label of origin such as Illinois, Alabama and so on. Perhaps the commonly assumed risk facilitates the recognition of problems. So far, Germany has managed to keep different parts of the problem separate, as if there weren’t any connection between the difficulties of its banks and those of more vulnerable countries that were caused by the weakness of their governments. The obsessive attention given to the public deficit only threatens to transform the monetary union into a hellish mechanism of recession, as did the gold standard in the ’30s.

It would have been better for banks to have collective European support that directed them toward a supranational dimension instead of avoiding new intertwinement between internal politics and financial powers. In the meantime, it is necessary to make the European Financial Stability Facility operational as soon as possible, even though it might not be sufficient. Now Berlin appears to be on its own when it comes to postponing decisions and it has even been abandoned by its traditional northern allies.