The European Financial Stability Facility (EFSF) should be as reticent as possible in providing guarantees to European member states, banks and other financial institutions, says Michael Koetter, Professor of Global Economics & Management at the University of Groningen. ‘It must be made clear that the fund will only take effect in the worst-case scenario. And not only the banks, but individual savers and investors must accept their responsibilities too.’
The Greek crisis has put several European banks under severe pressure. The Belgian Dexia is one example, but French and German banks also have a lot of exposure to Greek loans. Now that it has become doubtful whether they will ever see that money again, the question arises of whether the banks – that have already suffered major losses due to the banking crisis in 2007-2008 – can ever recoup their losses. Despite this difficult situation, the EFSF bailout fund should make as few promises as possible about financial support, says Professor Koetter. ‘Recent research shows that banks will take considerably greater risks if it is directly or indirectly suggested that they will be bailed out in an emergency. Something we definitely don’t want.’
That a large bailout fund has been set up is a sensible move, in Professor Koetter’s opinion, but too little thought has been given at European level to the signal which this then sends to the banks. As he explains, ‘of course, there needs to be such a fund, and the decision-making surrounding it should be open and democratic, but Europe is also sending an implicit signal that there is a safety net. It should be made absolutely clear that very stringent criteria will apply before that safety net can be deployed. Europe needs to be hard-nosed about it. Only system errors should be recompensed; the fund should not be used when financial institutions or countries make bad decisions. This warning must be fully understood.’
Bankers are still insufficiently aware of the risks of their behaviour, Professor Koetter feels. As far as he is concerned directors who perform badly should be dismissed and banned from ever working in a financial institution again. But the professor thinks it’s too simplistic just to point to ‘bad banks’ as the main cause of the present crisis. ‘Shareholders and savers also played a part. They bought financial products which they didn’t understand and allowed bank executives to take unwarranted risks. They must also be made to understand what their part is.’
Following the banking crisis of 2007-2008 a lot more supervision was introduced to the financial system. Yet the bodies set up are still far from as effective as desired, says Professor Koetter. The European Systemic Risk Board and the EFSF still think far too much in terms of national interests, with ‘net beneficiaries’ and the ‘net contributors’ at direct odds. The opportunity that the present crisis provides should be used to start managing costs and revenues centrally, is Professor Koetter’s view. ‘The present Union is too equivocal; in the long run the only option will be to move towards a more Europe-wide approach. And that means also having joint tax collection (i.e. a fiscal union). Perhaps now would be the right time to set that up.’
Professor Koetter realizes that there is little public support at the moment for handing more powers over to Europe. But he is still very hopeful that Europe will eventually find solutions to the problems it is facing. ‘That even the German parliament has agreed to the enlargement of the EFSF is encouraging. Until recently the Bundestag was hopelessly divided on even the most minor matters. But they understood that this was a concern which extends far beyond their party political interests and they reached agreement. We will see that happening more often in the future. Our politicians will start to realize that they are facing a momentous task.’
Article by Barend Abeln and Jan Jacobs on the website of the ESB (Economic Statistical Reports)
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