I don’t often take issue with The Wall Street Journal, but a recent column by David Wessel cries out for a response. His column is a description of the potential for an unraveling of the euro zone and of the euro itself, and of what needs to be done to preserve them both.
Wessel notes that [emphasis mine]
Today, banks in one euro-zone country are reluctant to lend to banks in another for fear that they won’t get repaid. Bank lending among euro-area banks at the end of 2011 was 60% below the 2008 peak. Money is moving not through usual bank-to-bank channels but only through the European Central Bank. The urge…has given way to a rush to “ring-fence” assets and liabilities within individual countries.
He notes further that
Banks and investors are increasingly unwilling to buy bonds of governments other than their own. Stronger northern European banks are reluctant to lend to customers and governments in southern and Eastern Europe.
You bet—see that bit about not expecting to be repaid. Surely, it is no surprise that one enterprise declines to do business with another, or with a government, that the first views as unreliable. Such a decision is entirely reasonable—it’s how sound businesses stay sound, for their own good, for the good of their employees, for the good of their larger community.
Wessel then quotes an example offered by Philipp Hildebrand, a former Swiss central banker, in an effort to show the unfairness of the situation:
Consider two similar companies, one Austrian and one Italian, that produce the same thing and sell to customers in Tirol in Austria. The difference: the Italian firm, through no fault of its own, has to pay six percentage points more to borrow money. ”It kills whatever effort you make on structural reform,” [Hildebrand] said.
This is certainly too bad for the Italian firm and for the Italian government’s effort at reform, but where is the unfairness of the advantage to the Austrian firm? The Italian firm operates under a government whose policies work against that firm’s ability to honor its obligations. Further, how does this obligate in any way the German or Dutch or Finnish—or Austrian—taxpayer?
Beyond Europe’s new bailout of Spanish banks, there is talk of strengthening the authority of a pan-European banking supervisor…and creating a pan-European deposit-insurance fund so Italian depositors won’t move euros from Italian banks to safer German ones.
But this is insane. In the first place, why shouldn’t Spanish depositors, or Italian depositors, or…—taxpayers all—move their money to safer locations? Why should the taxpayers in those safer locations be on the hook for making other nations’ debtors, including those governments, whole? There’s a very good reason some banks are safer than others, some economies sounder than others. Some took—and take—better care of their fiscal responsibilities.
Banks are hunkering down at home. National regulators are acting to protect their banks from the rest of Europe. Governments are rebuilding old walls to protect taxpayers from bailing out others’ banks.
Why should they not? By what remotest stretch of imagination should a sound bank be required to lend to an unsound bank—see the bit above about repayment expectations? Why should taxpayers of one nation be required to throw their own hard-earned money into the bottomless pit of the profligate—see the bit above about repayment expectations?
And if this means the breakup of the euro zone and its currency, well, I’ve written about that elsewhere.