Thursday

28th Mar 2024

Opinion

Europe has a banking crisis, not a wages crisis

  • Is linking bankers' bonuses to productivity being considered? (Photo: suburbanslice)

To a hammer every problem looks like a nail. EU leaders are once again proposing familiar solutions driven more by what is possible, even convenient, than by what the problems actually are.

Given that recent rhetoric has almost exclusively been about competitiveness fiscal and sovereign debt problems, one could be forgiven for having already forgotten that this was first and foremost a financial crisis.

Read and decide

Join EUobserver today

Get the EU news that really matters

Instant access to all articles — and 20 years of archives. 14-day free trial.

... or subscribe as a group

The fact of the matter is that our leaders have proven incapable of understanding and tackling the financial crisis. Their inability and unwillingness to tackle financial sector problems upfront have put us in a bigger mess where both the financial health of EU banks and sovereigns is suspect. Now the solutions they are proffering could make things even worse.

At their summit today, EU leaders will discuss the outlines of a so called comprehensive deal that will address the on-going crisis in the EU now and forever, or so they tell us. The main focus of this deal is fourfold. A primary focus is fiscal retrenchment where promises will be made to cut expenditures and bring deficits under control. This will be supplemented by stronger sanctions under the stability and growth pact and a debt brake – a legally binding limit on deficit spending. Having failed to tackle the problem of destabilising leverage in the financial sector they are now focusing on fiscal straitjackets that will dampen already anaemic growth. Do they know where growth will come from? Have they thought through how further restrictions on policy space in the EU may result in more financial instability?

Another main focus of the deal is the so called competitiveness pact that is basically about wage restraint for blue collar and public sector workers with some lip-service paid to productivity and employment.

As I remember it, excessive and badly designed compensation structures in the financial sector were major factors in the financial crisis. Having failed to address that (bonus levels are back to pre-crisis levels), our dear leaders are focusing on squeezing workers' wages instead. Have they considered indexing banker bonuses to growth in productivity or real contribution to the economy?

When the opportunity presented itself, our leaders chose to hide rather than tackle problems in their banking systems. As a result, the EU was unable to act decisively to tackle Greek debt problems. German and French banks that held large amounts of Greek bonds were too weak to share the burden of adjustment with Greek taxpayers. In a manner akin to Mubarak blaming the ‘foreign hand' for street protests in Egypt, our leaders found it easier to blame lying Greeks and lazy Italians rather than own up to the black holes at the centre of their own banking systems.

The re-designed stress tests, another part of the comprehensive deal, will continue to perpetuate the myth of a healthy German and French banking system. Have our leaders thought how this smoke and mirrors exercise undermines public trust and market confidence in the EU?

A final part of the package deals with increasing the size of the European Financial Stability Fund to the size promised a whole year back but does nothing to address its deeply flawed design. Also in the package is a plan for a permanent European Stabilisation mechanism that is only marginally better in design than the EFSF. Countries will get into financial trouble but the combination of high conditionality, inadequate financial support instruments and penal interest rates inherent in the package will not allow them to get out. Have our leaders got an exit strategy? Are they willing to accept losses on the EFSF or bilateral loans provided Greece and Ireland cannot afford to repay?

Two countries in Europe, Iceland and Ireland, have already been brought to their knees by banking systems that were far too big. Others such as the UK and Belgium have suffered large fiscal and economic costs due to troubles in their large banks. Yet, tackling the ‘too big to fail' problem is not even on the agenda in the EU. Are we going to allow the lobbying by large EU banks to bring even more countries to their knees in Europe?

The most effective way of restoring confidence in the EU banking system is to have rigorous and stringent stress tests, an EU wide moratorium on bonuses and bank dividends and allowing the use of EFSF funds for bank recapitalisation. The squeeze underway in Ireland and Greece that will immediately worsen their debt problems can no longer be ignored. Easing the terms of financial support and credible strategy to remove debt overhang will help revive these moribund economies. The success of a comprehensive deal rests on the ability of EU leaders to show that tomorrow will both be different and better than today. As things stand now it will be different but worse.

The writer is managing director of Re-Define, an international economic policy think-thank.

Disclaimer

The views expressed in this opinion piece are the author's, not those of EUobserver.

EU Modernisation Fund: an open door for fossil gas in Romania

Among the largest sources of financing for energy transition of central and eastern European countries, the €60bn Modernisation Fund remains far from the public eye. And perhaps that's one reason it is often used for financing fossil gas projects.

Why UK-EU defence and security deal may be difficult

Rather than assuming a pro-European Labour government in London will automatically open doors in Brussels, the Labour party needs to consider what it may be able to offer to incentivise EU leaders to factor the UK into their defence thinking.

Column

EU's Gaza policy: boon for dictators, bad for democrats

While they woo dictators and autocrats, EU policymakers are becoming ever more estranged from the world's democrats. The real tragedy is the erosion of one of Europe's key assets: its huge reserves of soft power, writes Shada Islam.

Why UK-EU defence and security deal may be difficult

Rather than assuming a pro-European Labour government in London will automatically open doors in Brussels, the Labour party needs to consider what it may be able to offer to incentivise EU leaders to factor the UK into their defence thinking.

Column

EU's Gaza policy: boon for dictators, bad for democrats

While they woo dictators and autocrats, EU policymakers are becoming ever more estranged from the world's democrats. The real tragedy is the erosion of one of Europe's key assets: its huge reserves of soft power, writes Shada Islam.

Latest News

  1. German bank freezes account of Jewish peace group
  2. EU Modernisation Fund: an open door for fossil gas in Romania
  3. 'Swiftly dial back' interest rates, ECB told
  4. Moscow's terror attack, security and Gaza
  5. Why UK-EU defence and security deal may be difficult
  6. EU unveils plan to create a European cross-border degree
  7. How migrants risk becoming drug addicts along Balkan route
  8. 2024: A Space Odyssey — why the galaxy needs regulating

Stakeholders' Highlights

  1. Nordic Council of MinistersJoin the Nordic Food Systems Takeover at COP28
  2. Nordic Council of MinistersHow women and men are affected differently by climate policy
  3. Nordic Council of MinistersArtist Jessie Kleemann at Nordic pavilion during UN climate summit COP28
  4. Nordic Council of MinistersCOP28: Gathering Nordic and global experts to put food and health on the agenda
  5. Friedrich Naumann FoundationPoems of Liberty – Call for Submission “Human Rights in Inhume War”: 250€ honorary fee for selected poems
  6. World BankWorld Bank report: How to create a future where the rewards of technology benefit all levels of society?

Stakeholders' Highlights

  1. Georgia Ministry of Foreign AffairsThis autumn Europalia arts festival is all about GEORGIA!
  2. UNOPSFostering health system resilience in fragile and conflict-affected countries
  3. European Citizen's InitiativeThe European Commission launches the ‘ImagineEU’ competition for secondary school students in the EU.
  4. Nordic Council of MinistersThe Nordic Region is stepping up its efforts to reduce food waste
  5. UNOPSUNOPS begins works under EU-funded project to repair schools in Ukraine
  6. Georgia Ministry of Foreign AffairsGeorgia effectively prevents sanctions evasion against Russia – confirm EU, UK, USA

Join EUobserver

EU news that matters

Join us