“We’re seeing a bankers’ Europe emerge, that may make even Wall Street envious.”

 by Kenneth Haar.

The financial and economic crises have revealed the entrenched power of the banks in the European Union. In an essay, Corporate Europe Observatory’s Kenneth Haar describes how a wave of financial regulation was set in motion by the crisis in 2008. The dream of a European Union that would curb the power of finance has become a joke, and instead we’ve seen a bankers’ Europe emerge that may make even Wall Street envious. Here’s a summary of the essay ‘Stop Listening to Banks’ (Kenneth Haar, 2012), which can be read fully online here.

The problem is systematic. The crisis revealed both extreme excesses by the banks and a flawed system of supervision and regulation. It left their public reputation in tatters. But new effective regulation was not the first priority. Top of the list was saving the banks.

Enormous amounts of public money have been put at risk to save the banks. Combined, the 27 member states of the EU have (by October 2011) set aside 4.5 trillion euro for support, guarantees and loan packages to banks, or almost double the annual GDP of Germany [The Netherlands put aside 313.33 billion, which is 53 percent of the Dutch GDP].

The generous side of the ECB
The euro crisis has revealed the potential to raise huge sums of money when the health of the balance sheets of banks is at stake. In December 2011, the new President of the European Central Bank, former Goldman Sachs director Mario Draghi, launched a bold initiative to ignite bank lending to the private sector and calm the rise or even reduce the interest rate on sovereign bonds. The ECB spent 489 billion euro in this first batch of the Long Term Refinancing Operation (LTRO) – cheap loans and no strings attached – a move widely welcomed by the banks. The bargain loan sale was to continue, and in February 2012 another 530 billion was put up for grabs, this time to the benefit of certain consumer loans – and bringing the total to 1 trillion euro. But there is little real evidence to prove the LTRO has met its objectives. While President Draghi claimed the initiative to be ”an unquestionable success”, his own ECB reported in February that loans to the real economy actually fell in February.

Absurdities
The jury may still be out on the final verdict, but either way the LTRO begs a couple of questions. If the ECB can provide so much money, why spend it boosting the banks’ coffers in the hope that the banks will lend more cheaply to governments? Why not lend directly to governments? And there’s another absurdity at play: the money spent on the LTRO is double the amount of money put into the new rescue fund over the next three years, the European Stability Mechanism (ESM), to offer loans to the governments of states in severe crisis. While the LTRO attracted little political controversy, finding half the amount of money for government lending has been very difficult and has taken several EU summits to get settled. [In order to get access to ESM funding, countries should adhere to proposals of the EC and economic partnership programmes including structural reform descriptions. The ESM may demand an unlimited amount of money of European countries and they’re allowed to make high risk investments.]

Shaving Greece
During 2011 it had become clear that it was impossible for Greece to service the burden of debt accumulated, which included loans to private banks. A so-called ‘hair cut’ to trim the debt was needed.

After negotiations at the Eurozone summit in July 2011 the banks had to swallow a 50 per cent cut, but the value of Greek bonds had plummeted to 35 per cent of their nominal value. With the deal, governments had in fact come to the aid of banks. Less a ‘hair cut’ for banks, more a full-body shave for Greece. And there was an extra bonus for the banks, with a clause in the treaty underpinning loans to crisis ridden Eurozone economies – the ESM Treaty – that will prohibit governments from future attempts to make the banks write off debt owed to them by governments.

Stop listening to the banks
What this comes down to is the dominance of the financial sector in the debate on financial regulation, and banking regulation is no exception to the rule. In a comment on banks’ influence on the handling of Greek debt, two financial experts, Simon Johnson and Darem Acemoglu, recently wrote: “The lesson for Europe – and for the US – is clear: it is time to stop listening to what banks say, and start focusing on what they do. We must re-evaluate the distorted political economy of the financial sector, before the excessive power of the few imposes even larger costs on everyone else.”

It ought to be shocking to see the dependence of decision makers in the Commission and in member states on banks and bankers. When they want advice on banking regulation, they ask bankers. When the banks are in trouble, they socialize their debt. When the economy is in trouble, they hand out money to banks. The bankers are grateful, but society at large shouldn’t be.

Next Krantje Boord: More about the European Stability Mechanism and its consequences.