Published on guru focus, June 23, 2010.
Giving a speech in Berlin, I feel obliged to speak about the euro because the euro is in crisis and Germany is the main protagonist. Unfortunately I didn’t get the timing right because the crisis has both a fiscal component and a banking component and the situation of the banks is just now approaching a climax. A comprehensive analysis will have to await the publication of stress test results. The best I can do at this moment is to put matters into a historical perspective.
I believe that misconceptions play a large role in shaping history and the euro crisis is a case in point.
Let me start my analysis with the previous crisis, the bankruptcy of Lehman Brothers. In the week following September 15, 2008 global financial markets actually broke down and by the end of the week they had to be put on artificial life support. The life support consisted of substituting sovereign credit for the credit of financial institutions which ceased to be acceptable to counterparties … //
… It is impossible to be more precise at the moment but there are grounds for optimism. When the solvency situation of the banks has been clarified and they have been properly recapitalized it should be possible to devise a growth strategy for Europe. And when the European economy has regained its balance the time will be ripe to correct the structural deficiencies of the euro. Make no mistake about it; the fact that the Maastricht criteria were so massively violated shows that the euro does have deficiencies that need to be corrected.
What is needed is a delicate, two-phase maneuver, similar to the one the authorities undertook after the failure of Lehman Brothers. First help Europe to grow its way out of its difficulties and then revise and strengthen the structure of the euro. This cannot be done without German leadership. I hope Germany will once again live up to the responsibilities that go with a leadership position. After all, it had done so until now. Thank you.
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