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Fazit - das Wirtschaftsblog

Das Faszinierendste aus Wirtschaft und Finanzen. Prägnant beschrieben und kenntnisreich analysiert von Autoren der F.A.Z. und der Sonntagszeitung.

The Euro: Never Waste a Good Crisis, Part II

| 4 Lesermeinungen

Never waste a good crisis: We heard this sentence often in the subprime crisis, but we rarely hear it today. It seems time to call it into memory. By Patrick Bernau

Never Waste a Good Crisis: We heard this sentence often in the subprime crisis, but we rarely hear it today. It seems time to call it into memory.

Photo: Hannes Jung

By Patrick Bernau

Do you remember? At the height of the Financial Crisis, when banks in the United States, Great Britain and elsewhere were on the brink of bankruptcy, we often heard the famous sentence: Never waste a good crisis. It is a shame that we seem to have forgotten it.

On Thursday and Friday, the EU summit once again discusses how to deal with the Euro crisis. Outside of Germany, people seem to wonder why chancellor Angela Merkel and many of the Germans do not want to give more money for the resolution of the crisis – at least not until reforms are established. But a look back to the Subprime Crisis shows a lot about the reasoning in Germany.

When the Subprime Crisis struck, governments rescued their banks with billions of dollars. Today, we are some years older but not much better prepared for the next crisis. Some banks have been closed. But many regulatory initiatives got stuck, others are hard to understand for public opinion, and the Volcker rule restricting banks from proprietary trading was not yet in force when J.P. Morgan lost billions of dollars last month. In public opinion, the subprime crisis surely has been wasted.

Now what about the Euro crisis? The solvent Euro countries and the IMF have given billions of money. But giving money is only a short-term solution to the crisis. If we want to prevent an Euro crisis from happening again, structural reforms are necessary in some of the peripheral countries – such as Greece, which is number 100 in the World Bank’s “Doing Business” ranking. Banking reforms are necessary in other countries such as Spain. Institutional reforms are necessary in the the European Union in order to prevent crises like these from happening again. You can opt for giving sovereignty to the EU or giving full responsibility to member states, but something has to happen.

Such reforms are hard, painful and difficult to manage – they are even harder than tighter regulation for banks. So there is a large danger of forgetting these reforms once the crisis has calmed down with the help of money. If this happened, the Euro crisis would have been wasted, just like the Subprime crisis.

So we don’t need to be surprised that Germans lose their inclination of giving money. At the beginning of the crisis, most of them were in favor of helping out Greece. Today, they are not. This is a well-known psychological effect: People do give money – as long as they get the feeling that their money really helps. This feeling is already lost.

Today, money has been thrown at this crisis for more than two years, and the necessary reforms don’t seem to be underway. Instead, many signs of wasting the crisis are already apparent. Some European countries – and many anglo-saxon economists – want a lot more money to be spent before the European institutions are reformed. Spanish Prime Minister Maiano Rajoy insisted on getting the money without noteworthy conditions, thereby prompting the new government in Greece to start renegotiating about Greece’s reforms.

If the pressure for reforms is released now, there is a big danger of wasting this crisis – and getting similar problems or even larger ones some years ahead. This should not happen. There is still time for reforms. Europe is not as near to the collapse as some people fear – in general, people are the more worried the further away they live from Europe.

Last Week, Martin Wolf asked: Is there time available to impose new rules and procedures? Answering “no” means wasting this crisis.

“Fazit” is the economics and finance blog of the German national newspaper Frankfurter Allgemeine Zeitung. Occasionally, we publish blog posts in English. You can find our English posts at http://www.fazitblog.de/english. An RSS feed is available at www.fazitblog.de/english/rss. And please follow our English Twitter account @Fazit_Blog.

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4 Lesermeinungen

  1. @fionn
    Please allow me a few...

    @fionn
    Please allow me a few comments;
    Cynics frequently say “you can’t have enough of a good thing”. I guess it can apply to a financial crisis as well, if you’re a short seller, or possibly a gold bug.
    Then too, there’s the old wisdom of “nothing succeeds like excess”.
    I don’t think there’s a concerted effort to wreck the Eurozone, simply because North America and Asia have too much invested in Euroland and I don’t think they’re anxious to see their investments fade to zero.
    Any idea of a conspiracy, strikes me questionable, simply because most conspirators seem unable to agree on anything and steer a course of action that would yield positive results.
    It reminds one of the saying “the best laid plans of men and mice go awry”.
    The global financial institutions are so interwoven and interlinked , that not one country can escape some of the effects of the possible collapse of Euroland.
    I think we’ll probably see a serious scramble by governments to stave off a collaps of the international financial system, by pumping money into the system, since they don’t know how to cope with any ensueing social upheavals.
    Perhaps a look at the numbers of the increase in the money supply in the varius countries, would give us an indication of the dilutive effect of this. Or who knows, they hope that their obligations may well be erased by a massive increase in inflation.
    We live in difficutl times.
    As well there remains the impression that regardless as to who wins the next US election there will be little change, simply because the problems seem just too big and unmanageable to cope with — and what politician is prepared to make profound changes, for which he will be rewarded with dismissal from office in the next election. It seems most want to just keepon going, without rocking the boat, and hoping the economy will recover and produce jobs for a growing populaton. Slim chance for tht to happen.
    The result will be a continued drop in the standard of living, as we see already iin some regions of the US, where the real estate bubble has burst, und were the migration of well paying jobs to low-cost countries has eviscerated the middle class and destoyed much of their aspirations to “the good life.” It seems “The American Dream” is fading.
    Batten down the hatches, tough times are coming.
    That’s how I see it.
    pax vobiscum

  2. "Never waste a good crisis" -...
    “Never waste a good crisis” – doch man sagt auf E auch “You can have too much of a good thing”.
    This crisis began with the revelation of many years of US toxic debt being issued (enabling the USA to live beyond its means) and well-rated by US rating agencies.
    Now the game has changed imo – the aim is to wreck the Eurozone, as the Euro is a dangerous challenge to the USD.

  3. Ich stimme Ihnen zu. Etliche...
    Ich stimme Ihnen zu. Etliche wichtige Lehren aus der Immobilienkrise und der nachfolgenden Finanzkrise wurden nicht konsequent in Maßnahmen umgesetzt.
    Und die Folgen dieser Krisen sind auch noch keineswegs beseitigt; auch nicht in den USA. Vielmehr sind einige Teile der jetzigen sogenannten Eurokrise Auswirkungen aus der Krise 2007/2008.
    Es sieht allerdings nicht so aus, als ob die politisch Verantwortlichen aus den Fehlern der früheren Krise gelernt haben. Im Gegenteil, die Fehler sollen nunmehr auf höherer Ebene wiederholt und ausgeweitet werden: Damals waren undurchsichtige Finanztitel ein wesentliches Problem; heute werden über EFSF, ESM und über Target Neuauflagen von fragwürdigen Wertpapieren konstruiert. Und das in erheblich größerem Stil.

  4. Eurolnd's Black Hole...
    Eurolnd’s Black Hole
    Interesting observations Mr. Bernau, but perhaps the reluctance of people in the Republic of the Germans to dump more money into the “Euro Crisis” may well be attributable to the commen sense of the people who do not want to throw good money after bad — as has been the case until now.
    Their thinking seems to reflect the recognition that Euroland is not a homogenous entity, or federation like the USofA, but a a collection of different societies with different cultures and different views of the world. To have all of these diverse groups sing the same hymn from the same sheet of music, is difficult at best — as we have so far discovered — or nary impossible.
    To recognize thise reality, suggests that the current framework is not working and a new structure will have to be found.
    Perhaps a two-tier Euroland may be appropriate? Or perhaps a return to a common market and economic entity, without the attempt to build a political structure that seems to have little hope of success.
    I think the citizens of Germany have recognized that, and their Government is fortunately steadfast enough to stick with it’s view of what needs to be done to save a shaky enterprise.
    As it stands, to give more money to the one’s who are not abiding by the rules, is largely seen as throwing funds into a bottomless pit.
    I am sure I am not alone in this view.
    Pax vobiscm

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