The Lost Continent By Gavin Hewitt

By Professor Jeff Atik

The challenge with European democracy is its constantly shifting notions of demos - who are the people who should exercise political determination. The current Euro crisis - and the ensuing imposition of austerity policies on Greece and Ireland, Spain and Italy - demonstrate a democratic irony. As Gavin Hewitt points out, there is nothing democratic about the adoption of austerity; austerity is not a lifestyle choice struggling countries freely assume. The Euro crisis precipitated changes of government (left to right and right to left) in the affected Member States and fierce popular backlash. Yet Angela Merkel, the physician prescribing austerity to faltering countries, responds to democratic signals given by her German electorate (who balk on bailing out their neighbors). Hewitt constructs a story where the democracy of Germany is pitted against the democracy of Southern and Peripheral Europe.

The Lost Continent focuses on national stories - and national leaders - and so at times has the feel of a tell-all. Silvio Berlusconi, to no-one's surprise, comes off the worst. His cynical disregard for anyone's interest saves his own marks, a new low in post-War Italian politics. Imagine how Angela Merkel felt upon receiving his 'political' advice to take on a lover. And even more respectable characters, such as Sarkozy, engage in behind-the-back smirkiness with regard to Merkel. But much of the focus falls on Merkel herself; we're never quite sure whether she is (as she claims) acting just like a Swabian housewife, guided by common-sense and prudence, or whether she is the instrument of peculiar German obsessions outside her control.

Austerity: The History of a Dangerous Idea by Mark Blyth

By Professor Jeffrey Atik

This review was originally posted on Jeffrey Atik's Blog Attraverso.There is nothing ambivalent about Mark Blyth's view of austerity: he is against it. Blyth's Austerity is more than a brief against today's accepted form of treatment for all that ails a slumping economy - it is an intellectual history of a powerfully attractive idea, though in Blyth's view, a dangerous one. Austerity fails for a number of reasons: it is unfair (it hurts the poor), it cannot be pursued simultaneously by all (someone must spend to ignite economic expansion), and (most damning) history shows it doesn't work.

Blyth admits to being a Keynesian. There is no shame in that: many neo-Keynesians are calling for an end to austerity. Blyth states, however, that he need not prove Keynes right ("for what it's worth, he was right, but that's in another book"); his goal here is simply to prove austerity wrong.

While austerity figures in contemporary U.S. politics, it is predominantly a European fix and fixation, famously imposed on Greece, Spain, Ireland and Portugal as a condition for European and IMF support in response to the Euro Crisis. Blyth begins the book by correcting the dominant narrative: Greece aside, the Euro Crisis did not originate by reckless government spending, but in private irresponsibility. Excessive private sector lending (provoked by cheap borrowing costs associated with the adoption of the Euro) sank the banks in Ireland and Spain (and their respective economies); the states became indebted in attempting to clean up the mess. Setting this history right is important -- as part of the moral authority for the imposition of austerity is a judgment of state fault. Austerity is not merely an economic prescription -- it is a punitive response.

As Blyth points out, there was little else Spain or Ireland could have done. Their banks were not only too big to fail; they were "too big to bail" -- that is, their liabilities were beyond the state's capacities to absorb. Hindsight suggests the better course might have been to abandon the banks -- but that course would have presented other grave difficulties. By shouldered bank indebtedness, several European states wildly exceeded the European limits on budget deficits and overall indebtedness. So why, Blyth asks, is the Euro crisis consistently described as a sovereign debt crisis? One must blame the state in order to justify the imposition of austerity.

Austerity well fits the anti-statist agenda. In the name of fiscal virtue, a wide range of social benefits and transfers are slashed: pensions, public salaries, health care, education. The anti-statists have been among us all along; the Euro crisis simply provided an opportunity to implement these wished-for roll-backs as a matter of prudent macroeconomic management. Austerity, the story goes, is the road to recovery. Except austerity hasn't led to any discernible recovery where it has been applied, at least in Blyth's review of the economic history. The proposed examples of austerity-generated growth - Ireland and the REBLL group of countries - don't hold up to critical examination. And there are many more examples where austerity simply made things worse.

European Parliament Approves Implementation of Basel III

By Professor Jeffery Atik




On April 16, the European Parliament approved the packet of legislation known as CRD IV, which largely implements the Basel III banking reforms. This completes the political phase of the European legislative process -- formal adoption of CRD IV by the Council of Ministers is expected to occur in June. Assuming the schedule is met, CRD IV will become law effective January 1, 2014. Consultations on the form of detailed regulations ('technical- standards') have now been launched.

CRD IV implements Basel III -- and does more. The term 'CRD IV' signals that this is the fourth generation of the EU's Capital Requirements Directive. The name is no longer precise: CRD IV is comprised of a Regulation (law that is uniformly applied throughout Europe) and a Directive (which requires national implementation and admits a certain degree of variation).

CRD IV increases the quantity and quality of regulatory capital a financial institution must hold. In most cases, transitioning to CRD IV requirements will place pressure on European banks to retain earnings, raise additional equity capital, dispose of assets or change their respective asset mixes. Under the existing version of the Capital Requirements Directive (which were adopted immediately prior to the onset of the 2007/2008 financial crisis), many European banks reduced their capital to extremely low levels. Reportedly some European banks had leverage ratios of over 40 to 1 -- that is, maintaining less than 2 percent of effective capital. Many of these same banks remain in crisis now -- a problem that in turn has infected the balance sheets of several EU Member States. CRD IV acknowledges the insufficiency of bank capital during the financial crisis. The new requirements are complex -- and involve a stack of charges and buffers. A minimum of 8 percent capital will now be mandated, computed with regard to a bank's risk-adjusted assets. Left undetermined for the time being is the overall leverage cap -- it is this simple metric that may prove to be the most meaningful limit on a bank's level of debt.

Attraverso: ECB's new role as eurozone bank regulator

By Professor Jeffery Atik

Early Thursday morning (December 13) eurozone finance ministers agreed to take a first step toward establishment of a banking union. The agreement will grant supervisory powers to the European Central Bank (ECB) - at least with regard to the 200 or so largest banks headquartered in the eurozone. Large European banks located outside the eurozone (chiefly UK banks) will continue to answer to national authorities. With the accretion of these new powers and responsibilities, the ECB will come to resemble the Federal Reserve which functions as both as a monetary authority and as the chief regulator of large banks operating in the United States.

The political accord reflects a compromise between the competing visions of France and Germany. France had desired a complete transfer of bank supervision to the ECB, effectively extinguishing national regulation. Under this approach all banks located within the eurozone would become 'European' in character. Germany resisted; Germany has been desirous of sheltering its politically powerful regional banks from European control. A reported late-night compromise between France and Germany has resulted in a mixed system - with the eurozone's 200 largest banks falling under the authority of the ECB and the remaining 5,800 or so smaller banks (including virtually all of Germany's regional banks) continuing under the oversight of national regulators.

Abandoning the Euro, Saving the Euro

By Professor Jeffery Atik

The Euro crisis tests more than the viability of the current currency arrangements. The sovereign debt crisis affecting Greece and Ireland, Italy and Spain is also testing the limits of wider European democracy. The status quo will likely be abandoned. The open question is whether the Euro crisis will lead to deeper integration among the EU Member States (as an artifact of a Euro rescue) -- or whether a collapse of the Euro will signal a retreat from the past achievements of the European project.

The European Union began as a common market for goods and services. A common European currency space is a more recent development -- the Euro serves as the currency of most (but not all) EU Member States. Adoption of the Euro has reduced trading costs, and has led to more transparent prices.

The Euro crisis is first and foremost a sovereign debt crisis, initially affecting a handful of EU Member States running unsustainable deficits. The sovereign debt crisis is itself an artifact of the establishment of the Euro -- neither Greece nor Spain would have been able to borrow as much in their former currencies (or on such favorable terms) as they were able to using the Euro. Prior to the Euro crisis, the financial markets valued Euro-denominated Member State obligations similarly. As the crisis developed, lenders became far more discriminating, demanding much higher Euro interest rates from weaker Member States (such as Greece and Spain) than from others.

For the grossly indebted Member States, there is no simple escape from these much higher borrowing costs -- absent assistance from more solvent Member States. And -- for the moment -- healthier Member States, such as Germany, have resisted intervention. Austerity has been bandied about (indeed, it has been 'imposed' on Greece), but there is a point of distress beyond which quite painful austerity measures cannot generate the budget surpluses needed by a country to dig its way out of debt. The better answer may be devaluation - but this path is not presently open to a country participating in a currency union like the Euro.

European Limits on Banker Bonuses

By Professor Jeffery Atik

The EU's Council has prepared its draft legislative package implementing the Basel III banking reforms -- known as CRD IV. Attention now shifts to the European Parliament for its response, expected this autumn. A complex process of reconciliation will follow. On one point the Parliament has drawn a line in the sand: the eventual CRD IV must contain significant limits on contingent compensation paid to bankers. The Parliament's starting point is a one-to-one ratio cap: bankers' bonuses cannot exceed annual salaries.

Basel III did not impose any limits on bankers' compensation -- although several European members of the Group of 20 had sought bonus restraints during the negotiation. Nor does Basel III restrict the ability of Europe -- or any other Basel party -- from imposing additional requirements on its banks. Europe's imposition of bonus limits in CRD IV may be described as "Basel III Plus" -- an additional term beyond the basic Basel III mandates.

There is a broad perception that the bonus culture of New York and London contributed to the 2007 financial crisis. Bankers seduced by the prospect of large contingent payments caused their firms to undertake inappropriate levels of financial risk. New limits on bonuses, in this telling, are needed to eliminate the distortion in risk appetite generated by prevalent compensation practices. But bonuses have their defenders -- and not just the bankers who receive them. There remain policymakers (albeit more likely those overseeing markets in New York and London) who continue to believe that bonuses are necessary to attract the creative talent that will drive economic growth.

European Politics and the Regulation of Bank/Insurance Firms

By Professor Jeffery Atik

On prior occasions, European implementation of the Basel bank regulatory system had proceeded rather mechanically. The Europeans actively participated in the Basel II process, reached agreement with the world's other major banking powers, and then faithfully enacted Basel norms into EU law. This has not been the case with the latest product of Basel: Basel III. While Europe once again exerted its influence during the negotiation, it has been decidedly less determined to give full effect to its Basel III undertakings in EU legislation. And the reason -- it should be no surprise -- is politics.

The linkage between Basel III and the European implementation (known as CRD IV) involves three levels of politics: global, European and national. The uncharacteristic European reluctance to carry out the Basel III mandates to the letter results from the varying distributions of influence at each level of the lawmaking game. A case in point: so-called 'bancassurance' -- financial conglomerates that are part bank, part insurance company. France's Societe Generale and Credit Agricole are two large examples of 'bancassurance'.

Euro Collapse or European Banking Union

By Professor Jeffery Atik

The implementation of the Basel III banking reforms in Europe has spanned two financial crises. And the European legislation is haunted by two specters: a possible collapse of the Euro; and -- in the alternative -- a blind leap into a European banking union.

The first crisis of course was the 2007 global financial meltdown that led to significant bank failures and costly bank bailouts. The Basel III reforms were designed to prevent a re-occurrence of this kind of banking crisis through various new mandates and disciplines. The Basel III response was negotiated within the Group of 20, where Europe had a substantial presence and an important influence. Based on the past record of enthusiastic adoption of Basel norms by Europe, one might have expected the passage of Europe's CRD IV legislative package to be largely a technical exercise. It has not proven to be one.

This is due in part to the timing. The complex European legislative process -- extending well over a year -- coincided with the outbreak of the second severe crisis, one more specifically centered on Europe. This second -- and ongoing -- crisis is the sovereign debt crisis (or the Euro crisis). Initially involving Greece, the sovereign debt crisis has spread to Italy and Spain, sharply raising borrowing costs of these seriously indebted countries and miring their respective populations into social misery.

The European sovereign debt crisis is in large part also a banking crisis, though different in many aspects from the 2007 global financial crisis. The Euro crisis reveals the inherent weakness of the current arrangement: Eurozone countries share a common currency and somewhat coordinate monetary policies, but borrow Euro-denominated funds in their respective sovereign capacities. Moreover, they bear primary oversight responsibilities for the banks headquartered within their respective territories.

The residual sovereign control Eurozone states maintain over their banks means that a bank in crisis will look toward its national authority (and its national authority alone) for deposit insurance coverage, bailouts and eventual resolution procedures. Which works well enough for those healthy Eurozone countries with large economies and small banks.

Bank Capital Reform in the Shadow of the Euro Crisis

By Professor Jeffery Atik

European banking reform continues to develop alongside of - and perhaps in spite of - the ongoing Euro crisis. A significant EU reform package - involving a new directive (Capital Requirements Directive IV, or CRD IV) and a new regulation (Capital Requirements Regulation, or CRR) - is making its way through the EU legislative institutions. These reforms are driven in large part by Europe's undertakings within the global Basel system: Europe has committed to implement much of the most recent Basel package of reforms (known as Basel III) by January 2013.

One of the chief requirements of the Basel III reforms is to increase both the quantity and quality of the 'regulatory capital' banks must hold. This capital is intended to operate as a financial shock absorber in the event of large losses - assuring a bank's continued solvency and sparing shareholders (and - in a worse case - taxpayers) pain. Basel III is a system of minimum standards - countries are expected to comply with Basel III's requirements but are free to impose higher standards. And several countries (Switzerland, for example) have determined to require their banks to maintain even more regulatory capital than what Basel III demands.