Can Europe Make It?

Instead of resisting the introduction of harmony and transparency in European finances, France and other 'old members' should lead it

Maximilien von Berg
31 January 2014

I opened this series on Europe on the run up to the 2014 European general elections with the hope of seeing more leadership from the institutions’ executives. Before Europe can regain momentum a basic acknowledgement is necessary: the European Union (EU) is not the root cause of the rough times Europe is experiencing. The EU, with all its shortcomings, cemented solidarity on the Old Continent during the crisis.

The EU’s future is dependent on countries’ capacity to reform today. European finances and the European banking system are therefore an absolute priority beyond matters of European foreign policy, defense and security, enlargement and development. Europe was not able to foresee the latest financial and economic crises, nor could it really have prevented them – though a more forceful Europe could prevent future cataclysms. This is surely what Commissioner Michel Barnier and his team are contemplating in their attempt to regulate and reform the largest financial institutions in the EU. Approximately 30 banks considered “too big to fail, too costly to save and too complex to resolve” are those targeted by this potentially far-reaching reform.

Although non-binding and only to be presented to the next European legislature, this project will be submitted to the European Parliament for a possible vote. As such, it would strongly protect taxpayers from banks liquidity shortages or outright defaults and necessary state intervention, even though it falls short from strict separation of retail and investment banking activities. Nonetheless, it seeks to introduce clarity and protection in a domain that needs both. In fact, regulators are sequencing the introduction of new requirements on the reporting of financial transactions in the coming months through the implementation of EMIR and with MiFID 2 by 2016

The capacity of European heavy weights to live up to the challenges of the opening century – public debt, pensions and healthcare spending, demographic change, immigration and relative economic decline – is key. France and Italy remain allergic to change and the United Kingdom’s dangerous game is not helping. Germany alone cannot succeed in steering the whole continent in the right direction. As long as political leaders do not make painful efforts to reach a socio-economic sustainable plan, Europe cannot be cured. Countries reluctant to reform such as France and Italy are certainly not showing the way forward. Recent criticism against Barnier’s plan by French leading politicians underscores their incapacity to reform banking and the EU’s determination to change the system. Critics say the split between banning proprietary trading, which currently represents 4% of balance sheets, and separating retail banking from investment banks’ more risky trading activities, will unsettle the very model of leading French and European banks.

But perhaps this is an initial cost necessary to sanitize and modernize a model that has reaped extreme havoc and worsened the burden on the taxpayer’s shoulders. The Vickers Commission in the UK already works towards separating the deposit taking business from the investment banks’ trading business. Banks may be forced to create spinoffs to trade on the derivatives market in the land of high risks and high returns, but would be equally secluded from the taxpayer’s money. The point is to prevent proprietary trading to develop again as economies get kick-started and quite simply to avoid some of the pitfalls at the origin of the 2008-2009 debacle.

This is also why I have hope in a more charismatic European leadership helped in its task by an active European Central Bank (ECB). If the United Kingdom’s economy is picking up amid deep cuts in public spending, this diagnosis cannot be made across the continent where France and Italy remain laggards where they should lead. In the past two years, the UK propelled by London has created over 1 million jobs and unemployment is dropping. This cannot be said of France, Italy, Spain and many other south Europeans. As long as France is reluctant to rendering the labor market more flexible, to reducing unemployment benefits and to decreasing corporate taxes, the country’s attempt to go forward will stall.

Assessments of French economic and fiscal policy by the OECD and the IMF remain grim. The political establishment should stop living in the 1970s and radically change course. The same is true in Italy where politics seem out of touch with reality and remote from the new generation of political leaders in Northern Europe. Beyond individual cases, attention should be paid to flat inflation (and the risk of deflation). Economies are timidly picking up; some genuinely recovering, others presenting flat growth. At 0.8% in the EU, inflationary values remain below the ECB’s 2% target. Unless a commodity price shock wave is triggered, inflation is set to remain tepid. In addition, foreign direct investment (FDI) has plummeted in 2013 in a number of European countries such as France, in contrary to Germany. The storm is not over.

Politicians must begin to voice what the majority of analysts and people who care have diagnosed. Politicians must end the vote winning easy ‘blame it on Eurocrats’ talk and tell their constituents efforts are necessary for the good of all. Together we can get out of the slump and the EU is the medium between European economies. The old statist nationalist approach will postpone the reform agenda. We need brave politicians at the national level, as well as the supranational European level. We need to acquire renewed confidence in Europe, which only positive voices of reform can incarnate. It is time to elect forward-thinking young European deputies (MEPs) in 2014. It is time to avoid the simplistic and flawed reasoning of anti-European voices already present in individual member states; for these could plague the next legislature. 

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