Everyone now agrees that Treasury Secretary Hank Paulson badly botched the Lehman Brothers crisis of 2009. But at least he had an excuse. Panicked by the speed of Lehman’s meltdown, he had no time for second thoughts. By comparison the German-led group of EU officials who engineered this weekend’s Cyprus bank bailout don’t have a leg to stand on. Although they had years to consider their options (Cyprus’s problems are closely related to those of Greece and have long been almost as obvious), they have opted for a “solution” that amounts to probably the single most inexplicably irresponsible decision in banking supervision in the advanced world since the 1930s.
As my colleague Tim Worstall has pointed out in a well argued contribution yesterday, they have weakened – perhaps catastrophically – the principal pillar supporting modern banking. This pillar is deposit insurance. Ordinary savers who had received a solemn assurance that deposits up to 100,000 euros were safe are now being asked to take a haircut. This raises questions about deposit insurance throughout the EU and invites runs on banks not only in the most “financially-challenged” nations such as Greece and Spain but even in Italy and France.
Let’s hope that, with reasonable luck, European regulators hold the line tomorrow (and if a commentator were to predict otherwise, it would be like crying “Fire!” in a crowded theater). But it is a fair bet that the botching of the Cypriot bailout has ensured that the agonizing economic malaise afflicting much of Europe for four years now will be further prolonged.
It is time for plain words. The ultimate source of Europe’s financial malaise is Germany. The German financial establishment was complicit from the beginning in the inflating of some of the bubbles in the afflicted nations. Now it is not only disowning its role in causation but, by forcing austerity on national governments and refusing to allow more than token inflation of the euro, it is turning the knife in those nations’ wounds.
It is already clear that though Japan for long has enjoyed exceptionally cordial relations with Germany (neither side advertises this but it is a fact), financial officials in Tokyo are now pressuring their German colleagues to relax the austerity policy. The most obvious outward evidence of this is Japan’s sustained effort in the last four months to depreciate the yen. Although the depreciation is popularly attributed to Prime Minister Shinzo Abe, in reality the policy is coming from the Tokyo Ministry of Finance, and the principal loser is Germany (which had been winning share against Japan in many advanced producers’ goods industries in the years of a cheap euro).
The United States enjoys no similar ability to apply the thumbscrews to the German economic establishment but President Barack Obama can still be a vital part of the solution. For all his shortcomings, he ranks abroad, if not at home, as the most respected American President in decades. He needs to talk to German Chancellor Angela Merkel – and talk openly for the permanent historical record. It is time to call Merkel’s bluff.