Financial markets will soon "regroup...to the rising sound of the rising crescendo of the next-euro crisis," writes UBS economic advisor George Magnus in a column published yesterday in the Financial Times.
In fact, EU leaders are completely misdiagnosing the problem, threatening Europe with the prospect of "zombie economies, institutions, and financial instruments" that could take down not only Germany, but the entire monetary union.
EU leaders have actually exacerbated sovereign debt and banking problems with their current policies:
They attribute the crisis to fiscal profligacy and the lack of adequate institutional fiscal mechanisms, rather than to the large external and competitiveness imbalances between member states. So, instead of coming up with an economic and debt adjustment strategy that distributes reform responsibilities symmetrically between debtors and creditors, leaders continue single-mindedly to pledge institutionalised fiscal discipline as the solution to the crisis. They have, in effect, sealed a pro-cyclical austerity zone.
A proper approach to resolving the crisis would have two distinct parts, and would comprise a true, equitable fiscal and monetary union:
Firstly, although Germany would never agree to the permanent transfer of the Bundestag’s authority to a European agency, the absence of any intent to transform European sovereign bond markets into a giant joint liability European bond market is a major weakness. It is going to make it harder for investors to return to orderly sovereign debt financing in the weakest economies.
Secondly, a proper approach to fiscal union would have to recognise the interconnectedness between the creditworthiness of sovereigns and banks. In other words, the handmaiden of a new fiscal federalism in Europe means very little unless accompanied by banking federalism too.
A more believable plan would complement fiscal discipline procedures and penalties with the transfer of strong executive powers to, say, the European Banking Authority to hold sway over capital and liquidity requirements, deposit and market funding arrangements and guarantees, resolution authority, and mergers.
Unless EU leaders alter their approach, the increasing likelihood of a Greek default in March, large sovereign borrowing, and eventually a French election will create market terror. The crisis will continue to escalate, resulting in the "zombification" of the European economy, governments, banks, Germany, and all.
Read more: http://www.businessinsider.com/ubss-george-magnus-prevent-the-zombification-of-europe-2011-12?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+TheMoneyGame+%28The+Money+Game%29&utm_content=Google+Reader#ixzz1hMzB4j5T
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