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Monday, July 26, 2010

EU Believes All Is Well



Greeks don't want austerity.  Italians don't want truth, and Germans don't want to be bossed around by EU officials.  Nothing inside the EU has changed with the results of the weekend's bank stress tests  Europeans are as European, and different from each other and unmergeable as ever they were.  The trick is to con everyone that the Euro and the EU are doing fine, and all players want to do that as long as they can.  Greeks like the bail-outs.  Italians don't want to have to face up to their debts, and Germans don't want the humiliation of being seen to have made mistakes.  No one is ready for a crisis.  Yet a crisis is still approaching, and is only delayed by the issuing of yet more debt to eurozone countries and banks that are not creditworthy.

The WSJ sums it up as follows -

The fact that only seven banks failed to pass is less relevant than the fact that the five Italian banks tested only squeaked by, as did Postbank, one of Germany's largest, and that Germany's eight landesbanken received a passing grade only because they "have yet to record a substantial part of total estimated write-downs," according to the International Monetary Fund. That relieves the pressure on a sector that German finance minister Wolfgang Schäuble says needs "an urgent reform."



 These regional banks are an important source of funding for Germany's small businesses. If they fail, the locomotive of the European economy might have a lot less fuel.



Song writers Rodgers and Hart were right that "the self deception that believes the lie" results in "no more pain, no more strain," at least for a while. But not permanently. It seem that the eurocracy has deceived itself into believing that all is well — it is, after all, easier to deceive others if you first deceive yourself. So the Committee of European Banking Supervisors, or CEBS, professes to find the results of the tests "rather reassuring" even though almost half of the banks that passed the test continue to "incorporate [in the required capital] a significant amount of government support." 
They've bought themselves a little more time.  That's all.

Wolfgang Munchau FT -


If you tried to test the safety of cars or children’s toys using the same method the European Union applied in its stress tests on banks, you would end up in jail. How so? Simply because the testing mechanism was calibrated to fix the result. The purpose of the exercise was to ensure that the only banks that failed it were those that would have to be restructured anyway.
At the same time, the supposedly clever idea was to demonstrate to the outside world that the rest of the banking system remained sound. The purpose of this cynical exercise was to pretend that the EU was solving a problem, when in fact it was not.
It is too early to judge whether the ploy worked. But from the informed reaction on Friday night, I suspect not. Expectations were not very high. But the EU undershot the lowest of them.

2 comments:

Mike Spilligan said...

Thanks for that, Tap. I didn't follow the outcome closely as I'd told myself in advance that too few failures wouldn't make it believable, and too many would generate too many searching questions. Seven is just about the Goldilocks result.

tapestry said...

They made a forecast that in a worst case scenario property prices would rise by 2% over the next two years.