'Europe's Banks Are in Far Greater Danger Than People Realize' (Interview With US Economist Eichengreen)

Spiegel
March 2, 2011

The European Union is hoping that aid to Greece and Ireland combined with closer economic policy coordination will be enough to put an end to the euro crisis. But that's not likely, warns US economist Barry Eichengreen. First and foremost, he says in an interview with SPIEGEL, Europe needs to help out its ailing banks.

SPIEGEL: Professor Eichengreen, you have spent many years studying whether the European common currency union could collapse. Your conclusion: It would be technically possible for a member state to leave the euro zone, but that politically it is about as likely as a meteorite hitting the Eurotower in Frankfurt. Are you sticking by that assessment?

Eichengreen: Yes, but with one condition. That at their summit in March, the member states face up to some unpleasant truths. Plan A has failed. Now they have to switch to Plan B. They must stop attempting to combat the crisis in Greece and Ireland by forcing these countries to pile more debt onto their existing debts by saddling them with overpriced loans.

SPIEGEL: But at the same time, Europe is stifling any chance of growth in Greece and Ireland by forcing them to comply with harsh austerity measures. Is there any way this strategy can actually add up?

Eichengreen: The present bailout attempts have never made sense. Essentially, all Germany and France want to achieve with these measures is to protect their own banks from collapsing. Now people are beginning to realize that there is no way around rescheduling Greece's debt -- and that will also involve the banks. For this to happen, there is only one solution: Europe needs to strengthen its banks! Greece lived beyond its means, but in Ireland and Spain it is the banks that are the problem. The euro crisis is first and foremost a banking crisis. 

SPIEGEL: How are governments supposed to explain to their citizens that they need to reserve yet more tax revenue for banks, this time due to loans for countries like Greece and Ireland? 

Eichengreen: It will probably be easier for Chancellor Angela Merkel to persuade German taxpayers to save their own banks than to fork out billions for Greece again. Especially since, with a haircut on Greek debt and measures to strengthen banks, it should be possible to draw a line under the crisis -- and preventing it from spreading to Spain.

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