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By Paolo von Schirach
October 12, 2011
WASHINGTON – Former Clinton era US Deputy Secretary Roger Altman makes a compelling case in a The Financial Times op-ed piece, (America’s blueprint for bailing out Europe’s banks. October 12, 2011), for the quick adoption by Europe of its own version of the TARP, (Troubled Asset Relief Program), the Washington engineered massive capital injection into the banking system, devised and implemented between the end of 2008 and 2009, that essentially saved America from financial meltdown.
A TARP for Europe
Altman’s basic point is correct. Just like America at the height of the financial crisis, Europe needs to shore up its limping banks with something like TARP. TARP was swift and it was imposed on US banks by the US Government. They had to accept an unprecedented injection of public funds to shore up their balance sheets and to give markets the confidence that the situation was under control. With all that new money coming in, no major US banking institution could be thought to be at risk any longer. Panic would be avoided. As Altman points out, to quell any lingering doubts, the capital injection had to be bigger than what markets might have expected. And the plan worked.
As Europe is now facing a similar confidence crisis in the solidity of its banks, because of the unknown amounts of bad debt they hold and the risky loans made to countries now in trouble, Altman argues that Europe should follow the US example and quickly put to together its own massive TARP program. Great idea. Except for one detail not really addressed by Altman.
Who’s got the authority to do this?
Who is going to do this? In the US, even though Washington was taken completely by surprise by the swift financial crisis in the Fall of 2008, there was an institution capable of reacting. Even though the US government is slow moving and generally weak because of constitutionally mandated divisions of power, in a time of real crisis leaders can find unity. And so they did at the end of 2008. The massive TARP program, (starting at around $ 700 billion), was passed immediately by a compliant Congress. And, thanks to the US Treasury Department, first under Hank Paulson in the Bush administration and now led by Secretary Tim Geithner, the implementation was quick.
And here is the problem for Europe. Neither the EU nor the Eurozone have a Washington equivalent. There is no European Tim Geithner. Certainly he is not in Brussels within the European Commission. The Commission is an appointed executive body with limited powers and no independent legitimacy. In Europe important decisions are still made through intergovernmental arrangements. And, in case you forgot, there are 27 EU members and 17 Eurozone members.
The problem: no existing institutions can carry this out
And here is the problem. A massive liquidity injection into the European banking system would require a rock solid consensus on the size, the timing, the management and the supervision of such an extraordinary measure. In other words it would require a brand new European Treasury. But there is no such things as there is no European Federal Government.
And my hunch is that Europe does not have the will and the tools to put this together. Washington may be weak. But it is still is the legitimate Federal Government of the United States of America. It has a degree of recognized authority. There is no Washington equivalent in Europe. And this is a real problem that magnifies the European looming crisis. There is a fire, but no Fire Department.
Distinguished Europeans call for a European Treasury
It so happens that in the very same FT issue in which Altman’s piece appeared, right in the opposite page there is a letter to the Editor signed by a number of fairly prominent Europeans, (but no leading national political figure in any of the member states), who urge European states to forget about national divisions and do something really bold:
“We, concerned Europeans, call upon the governments of the eurozone to agree in principle on the need for a legally binding agreement that would: 1) establish a common treasury that can raise funds for the eurozone as a whole and ensure that member states….[…..]” (Bold added)
Valid point, but no powerful supporters and weak platform
Basically these concerned Europeans quite appropriately, (see above), would like Europe to create the functional equivalent of the US Treasury Department that administered the TARP program that Altman referred to in his piece. Again, this plea is part and parcel of the same concept. Still, the fact that something so revolutionary is introduced via a Letter to the Editor, (albeit of a leading financial paper), signed by second or third tier EU personalities, tells you that this is a noble but futile attempt. Sure enough, these well meaning people will get a nod, may be even a polite hearing.
But I think that it might be easier to engineer a political union between the United States and Mexico between now and New Year’s Eve than to create any time soon a truly functioning, enabled European Treasury with all the legal authority of a national treasury.
EU institutional weakness makes this crisis much worse
And here is the problem. Of course the European banks need to be recapitalised and fast, in order to recreate trust. But I doubt that the existing European decision-making process will be able to create the instruments that would carry out the policy in a timely and decisive way. The newly minted European Financial Stability Mechanism is a small response to a bifg problem. Remember that it was in large part because of its inherent institutional weaknesses that Europe could deal with the Greek problem only incrementally and in slow motion, this way making it worse.
So, a TARP equivalent for Europe? A European Treasury to manage it? Yes, right on target. But do not count on the existing system to make any of this happen within a reasonable time. Sadly, this is Europe.