We have a ma­jor cri­sis in euro area, says Brown

The Pak Banker - - Company& -

LONDON: Gor­don Brown says that the eu­ro­zone will not solve its cur­rent fi­nan­cial cri­sis un­less it opts for a com­pre­hen­sive and sub­stan­tial res­cue pack­age, that would in­volve putting tens of bil­lions of pounds of new cap­i­tal into the eu­ro­zone's banks.

The for­mer Bri­tish prime min­is­ter said, in an in­ter­view I've just done with him, that the enor­mous li­a­bil­i­ties of the eu­ro­zone's banks are a se­ri­ous and sub­stan­tial ac­ci­dent wait­ing to hap­pen.

"I sense that in the first few months of 2011 we have a ma­jor cri­sis in the euro area. You've got fis­cal deficits, ob­vi­ously.

But you've also got mas­sive bank­ing li­a­bil­i­ties in the euro area, and that's not just the pe­riph­eral ar­eas. It's the core ar­eas of Europe where banks are re­ally un­der pres­sure be­cause they have lent huge amounts of money but have no guar­an­tee they have the cap­i­tal that is nec­es­sary to sus­tain them­selves in all po­si­tions.

"But then you've also got this im­ped­i­ment to growth. The euro area is in­flex­i­ble be­cause you can't ad­just your cur­rency... The struc­tural re­forms that are nec­es­sary to make a sin­gle cur­rency area work have not been com­pleted and in some cases have not been agreed.

And there­fore you've got to have a nigh noon...You've got to deal with these prob­lems in one fell swoop... They've got to do it in a way that seizes the ini­tia­tive from the mar­kets... It's got to hap­pen in the first months of 2011."

His fear is that the cur­rent process of bail­ing out one over-stretched eu­ro­zone coun­try at a time (Greece fol­lowed by Ire­land, so far), rather than go­ing for a once-and-for-all bailout scheme for the en­tire eu­ro­zone and all its banks, will elon­gate and max­imise the eco­nomic pain for eu­ro­zone mem­bers. In those cir­cum­stances, in­ter­na­tional in­vestors would "pick coun­tries off (for pun­ish­ment) one by one".

He added that "if the euro were to break up, the po­lit­i­cal and eco­nomic con­se­quences for all the coun­tries would be dis­as­trous" and the cause of global eco­nomic co-op­er­a­tion would be set back for years.

Also, if there is no com­pre­hen­sive and cred­i­ble res­cue and re­form pack­age for the eu­ro­zone, he feared that Euro­pean coun­tries would - at best - be con­demned to years of low growth and high un­em­ploy­ment. This would dam­age the UK, which con­ducts 50% of trade with eu­ro­zone mem­bers.

Mr Brown's in­ter­ven­tion mat­ters, partly be­cause he re­mains in con­tact with other Euro­pean lead­ers - and partly be­cause he is say­ing what mem­bers of the Bri­tish govern­ment and se­nior of­fi­cials at the Bank of Eng­land also be­lieve but can­not say (for diplo­matic rea­sons).

He is pes­simistic about the short term out­look for the global econ­omy, be­cause of what he sees as a rise of na­tion­al­ist and pro­tec­tion­ist ten­den­cies in many coun­tries, sim­i­lar to what hap­pened in the Great De­pres­sion of the 1930s.

The cen­tral theme of his new book, Be­yond the Crash, is that the US and Europe will be con­demned to years of low growth un­less and un­til the world's biggest economies co­or­di­nate their eco­nomic poli­cies and their ap­proaches to fi­nan­cial reg­u­la­tion, not just to tackle in­di­vid­ual crises but on a per­ma­nent ba­sis. -PB News

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