Now that the Greek crisis seems to have been warded off and Portugal and Spain are more or less covered by a European rescue mechanism, it would seem that Europe can be relieved again. But is that really so? The Greek crisis has led to new agreements over increased European monitoring of national budgets and a guarantees-and-bonds system of more than €750 billion in value. But Europe drags with it a weakened banking system. What used to be a South American and Asian disease now threatens the Continent.
Since the beginning of the financial crisis there has been a rare consensus that banking regulation is best organized at the European level. However, this has not led to E.U.-enforced action because each member state promised to solve the problem within its own country. This issue has subsequently dropped off public radar screens and few people have a clear idea of what exactly each member state has — or has not — actually done. Yet it is now clear that this situation is crippling Europe’s economic recovery.
By contrast, the global recovery is well under way. World trade has recovered and growth rates have returned to pre-crisis levels or even higher. This recovery is being led by emerging economies like China and Brazil. What is surprising is that the traditional synchronization between European and U.S. growth rates has been absent. The U.S. quarterly export growth figures for the end of 2009 and the beginning of this year fluctuated between 5 and 10 percent. Europe is achieving barely more than 2 percent. In the next four years, the I.M.F. forecasts economic growth to be between 2 to 2.5 times higher in North America than in the euro zone. This difference can be partly explained by the fact that the U.S. economy is more flexible, but this factor alone is not enough to explain the disparity.
When the first wave of government interventions in Europe and the United States ended, so-called stress tests to assess banks’ health took place in both continents. The tests examine bank portfolios — their assets, debts and levels of risk. Such tests are an essential component of a good recovery policy. However, in the U.S. they were conducted more thoroughlythan in Europe — and it shows.
Robust stress-tests by the Federal Reserve evaluated roughly two thirds of American banking assets. The test results for each individual bank have been published. This has ensured absolute transparency in U.S. financial markets so that private capital has been able to refocus efficiently.
European stress-tests were merely a cosmetic exercise, set up in such a way that the banks could not fail. The aim was to avoid loss of face. Moreover, the results for each individual bank were never published. Although the European Central Bank was formally in charge, the many sensitivities of E.U. member states were taken into account. The results were therefore of no practical value to investors. It’s true that there has been an injection of private capital into European banks, but this could never be done in a targeted way since the correct figures were not made public.
Similarly, government interventions in the banking sector by means of recapitalization and guarantees were successful but insufficient. It was done very quickly, so that we — in contrast to the U.S. — still face unresolved questions: Did governments pay too much for certain banks, and did they sell them off at too low a price?
This is a dangerous situation. Clearly, confidence in the European banking system is fragile. The result is that we are still waiting for a real economic revival. Europe may now face what I call a “Japanese winter.” After Japan’s financial crisis in the early 1990s, Tokyo failed to sort out the banks quickly. The consequence was a lackluster economic performance that lasted for more than 10 years. Only in 2003, after thorough reform of the banking system, did growth and employment start to recover.
Europe must learn from its errors and from others’ mistakes. We must seize the opportunity provided by the Greek debacle. Now is the time to develop a new European plan for the banks. Now is the time to set up a European financial regulator. Only then will we be able to prevent a Japanese winter and the next crisis.
Guy Verhofstadt, a former prime minister of Belgium and current leader of the Liberal and Democrat group of members of the European Parliament.