Sunday 11 December 2016

Banks bad, borrowers good won't help the recovery

Excessive indulgence for strategic mortgage defaulters is a recipe for further misery, says Colm McCarthy

Published 07/07/2013 | 05:00

HELP: ECB boss Mario Draghi says rates to stay low
HELP: ECB boss Mario Draghi says rates to stay low

The two-month sell-off in world bond markets was halted during the week by central bank announcements promising a continuation of low interest rates. But it has been clear since early May that the eurozone sovereign debt crisis can flare up again very quickly. Unfortunately, the eurozone has yet to be redesigned, five years into the financial crisis, to withstand these recurring pressures on struggling peripheral members.

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When a sub-group of the European Union's member states decided on the misnomer called Economic and Monetary Union in the 1990s, they created no more than a common currency zone without the necessary architecture of a true monetary union. The detailed design fell to a reluctant Germany which chose a central bank modelled on its own. Crucially, there was no centralised supervision of banks, no plan for resolving failed banks and no common system of insurance for retail deposits.

The absence in the Eurozone's design of the critical elements which would have avoided fragmentation has imposed high, avoidable and arbitrary costs, not least on Ireland. The Eurozone now consists of a grouping of non-co-operating nation states, several in severe depression, responsible for their own dodgy banks, lacking ready access to sovereign credit and reduced to exclusive reliance on budget-tightening to re-attain financial stability.

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