Europe's crisis continues to the point of worrying even Washington and Beijing. To better understand what is happening it is appropriate to distinguish i three mechanisms that are set in motion and that feed on each other. The first mechanism is that of sovereign contagion, with the public debt crisis which, in 2010, passed from Greece to Portugal, Ireland and Spain and, starting from the escalation of July 2011, also involved Italy. This is it translated into high interest rate levels by several percentage points compared to the pre-crisis condition, risking turning into self-confirming prophecies: if, fearing that the debtor will not be able to repay, we steadily raise the interest rate he has to pay, we risk making even a debtor insolvent which it wasn't. Albeit with alternating trends, this mechanism is alive and well and there is no way to get rid of it except with (at least partial) federalization measures at the Eurozone level of the debt of individual sovereigns under attack, which, in turn, postulates choices bold policies.
The second mechanism is set in motion because sovereign debt tensions reverberate on the banking system. Regardless of its intrinsic qualities (i.e. its attributes in terms of capitalisation, business model, efficiency and profitability) the banking system of each country he cannot pay the funds he collects on more advantageous terms than those on which his own sovereign collects them. Therefore, the persistence of sovereign contagion is progressively putting the banking systems of countries in public debt crisis out of action. There were then two measures that acted on this sovereign-bank short circuit. On the one hand, the provision with which, in October 2011, European banks were required to value the government bonds they hold at market values (and, at the same time, to increase their capitalization in the short term). On the other hand, the LTRO - the action with which the ECB has granted over 1000 billion euros of liquidity over 3 years at a rate of 1% - and the other measures with which the ECB moves to provide almost unlimited liquidity supplies to banks. The first provision worsened the short circuit; the second tended to defuse it. However, as Draghi has repeatedly recalled, there is a limit to this supply action by the ECB. While it would be unthinkable, as I have written on other occasions, to imagine that the banking system of a country would remain unharmed by the possible default of its sovereign, as long as the sovereign is only under tension it is conceivable to insulate the national banking systems from the short circuit. Two measures that would help are the recapitalization of banks in crisis countries through the bailout fund and the implementation of deposit insurance at the Eurozone level.
The third mechanism comes into operation when the tensions in the banking system have repercussions on households and businesses. Weakened by the operation of the second mechanism, the banking system cannot continue to function as if nothing had happened and must implement actions for the repayment of credit and/or the non-granting of new credits. Adding to an already negative trust situation, the credit crunch therefore contributes to worsening the recession in the real economy. The demand for consumption and investment falls and the demand for imports also decreases.
That this is where we are is confirmed by the reproaches coming from Washington - with Obama worried about his re-election if the US economy does not restart creating jobs by the summer - and from Beijing, where the deceleration of growth economy could pose problems of social stability.
What can you do? The recipes have been clear for some time and the longer you wait the worse it is. On the European side, we need the "Lionheart": we need to make the leap forward towards forms of political union that establish solidary, credible, capable of giving rise to rapid support actions of potentially unlimited size. This is the only way to overcome international speculation against the Eurozone. Because, as Governor Ignazio Visco has authoritatively reminded us, the Eurozone is a balanced area "more so than other advanced areas of the world" (read: Japan and the USA) and its "good" economic fundamentals are left at the mercy of speculation only by the weakness of its political fundamentals.
But “good” political fundamentals could have longer gestation times than the current situation allows. It cannot be ignored that if the European project were to be brought down by the persistence of international speculation – a one-eyed persistence that looks only at public debt and forgets the private one – the result would be harmful for everyone, not just for Europeans. So, perhaps something needs to move on the other side of the Atlantic Ocean as well. It is not enough to underline – as Draghi and Fabius rightly did – that the crisis started in the USA, it would be appropriate to remind President Obama that, just as it happened in 1933, America needs to re-regulate finance today too . Then, thanks to the decisive action of the unforgettable prosecutor Ferdinand Pecora - who emigrated to New York from the province of Enna - it was possible to lay bare in one month the casual, if not irregular, practices of some financiers who had been at the origin of the Great Crash of 1929 with serious damage to savers and markets. The outrage of public opinion and the determination of the Administration of Franklin Delano Roosevelt led to the enactment of the Glass Steagall Act and other regulatory provisions which allowed the western world to close the nefarious phase of financial instability. And you, President Obama, while you rightly ask European leaders to rise to the occasion, why don't you also try to revive America's "Sheep Month"?
