The current meltdown in the markets is quite terrifying. Trust between banks has collapsed and inter-bank lending has all but collapsed as fears of insolvency of counter-parties prevent banks from lending to each other. And it is concerns over solvency, not liquidity, which is the driving force behind the current, vicious twist in the banking crisis. Surely, it can only be a matter of days before the British Government steps in, directly injecting capital, to help re-capitalise our High Street banks in order to stabilise the banking sector. Forget moral hazard, forget ballooning public sector debt. Desperate times call for desperate measures. And these are desperate and dangerous times.
Whatever the criticisms of the US authorities and whatever the criticisms of the British authorities at least both countries have the institutions that are charged with tackling the banking crisis. The US Treasury and the Fed can concentrate on the travails of the US banking system and here in Britain the Treasury and the Bank of England can concentrate on the British banking system.
This is not the case in the Euro Area, where, yes, you have a central bank which can push emergency funds into the money markets and set interest rates but in other ways lacks the institutions to deal with a severe banking crisis in a coordinated and coherent fashion. In the rush to set up monetary union in the 1990s not nearly enough thought was given to the necessary political institutions that are required to maintain the euro’s long-term viability. All went well with the euro whilst the global economies thrived and the financial systems were not stretched. Just how the euro will fair now that we are facing the biggest banking crisis since the late 1920s is a different matter.
The omens do not look good. Both the Irish and the Greek governments when faced with crises of confidence in their banking sectors simply, and unilaterally, announced 100% guarantees for bank deposits. “Every man for himself” and blow the concept of European unity. And they really cannot be blamed. The Irish and Greek governments have to deal with their own national problems and are accountable to their own national electorates. If, as looks all too horrendously likely, the economic and financial situations deteriorate further the euro could come under very severe pressure indeed.
It should be remembered that no major currency union has survived without political union. In times of crisis national priorities take over from supra-national ones. There is no reason to believe that the Euro Area is fundamentally different from its predecessors. The Euro Area either pushes ahead and builds the appropriate institutions to shore up the currency’s long-term survival prospects, or it faces collapse.
