Bloomberg News

European Bankers Group Says Austerity Is Only Crisis Cure

April 24, 2012

Europe doesn’t need more rescue funds or structural reforms and should focus on fiscal obedience if the region is ever to emerge from its debt crisis, according to the head of the European Banking Federation.

“I don’t think we need structural changes -- fiscal discipline is needed,” Christian Clausen, the president of the EBF, said in an interview in Stockholm yesterday. “It’s decided by the European Union, they have set up the rescue funds, we have the liquidity in the system. I don’t think a lot more can be done.”

A backlash against austerity, extolled by Germany as the best way out of the debt crisis, made its way to Europe’s core this month. Dutch Prime Minister Mark Rutte on April 23 submitted his government’s resignation amid opposition to budget cuts, while in the first round of France’s presidential vote Socialist Francois Hollande beat President Nicolas Sarkozy on a platform rejecting austerity.

Yields on 10-year notes sold by Italy and Spain, which fell below 5 percent after the European Central Bank provided more than $1 trillion in three-year loans in December and February, have since hovered close to 6 percent as investors lose confidence in Europe’s ability to fight its crisis.

“What do you do about confidence? This is in the hands of the prime ministers and finance ministers,” said Clausen, who is also the chief executive officer of Nordea Bank AB (NDA), the Nordic region’s largest lender. “Of course, political discipline is needed. There’s no doubt about it.”

‘Not There Yet’

Banks in the region have the liquidity they need thanks to the ECB’s three-year loans, Clausen said. The biggest threat stems from political failure in the region to commit to austerity packages, he said.

Banks “have much more capital, they are well underway, but they are not there yet,” Clausen said.

The euro region’s debt climbed to 87.2 percent of gross domestic product last year from 85.3 percent in 2010, the highest ratio since the single currency was created in 1999, official EU figures showed April 23. Greece had the biggest burden at 165.3 percent of GDP. The region’s newest member, Estonia, had the smallest debt load at 6 percent.

Only five euro members -- Estonia, Luxembourg, Slovenia, Slovakia and Finland -- were within the EU’s 60 percent debt threshold.

Europe needs to promote policies that support economic growth and overhaul structures that retard competitiveness, according to Swedish Finance Minister Anders Borg.

‘Right Wing Populists’

“We need to do more on the fiscal side but particularly also with growth reforms,” he said in an interview with Bloomberg Television this week. “Italy and many other countries and our labor markets are lacking in flexibility, so there needs to be fundamental changes on how we work in Europe.”

He warns that too one-sided an adherence to austerity as a cure-all risks fanning support for political factions that are hostile to Europe’s goal of economic union.

“We must recognize that there’s a right wing populist reaction to some of the necessary European steps taken, we’ve seen that in the Netherlands, in France, Austria and even Sweden,” Borg said. “When the Germans are saying we need to be cautious on the fiscal side that also has political implications.”

‘Bumpy Road’

Hollande, who faces Sarkozy in a second round on May 6, said April 23 that austerity measures across Europe are leading to “desperation” and that he will refocus the euro area’s second-biggest economy on growth. Last week’s first round vote saw the leader of France’s anti-immigrant, nationalist party, Marine Le Pen, win 17.9 percent backing, the best result for her National Front party since its 1972 creation.

German Chancellor Angela Merkel, who has dominated Europe’s crisis response, said April 22 “solid budget management is a factor for producing growth, but of course not the only one. We’re still in the process of overcoming this crisis.”

There are only four euro members left in the 17-nation bloc with the top AAA credit grade at the three major ratings companies. France was stripped of its AAA credit rating by Standard & Poor’s in January.

“We must expect a bumpy road,” Clausen said. “It’s a different environment, but the market loses confidence in the governments every now and then when they have to fix this big gap in budgets.”

To contact the reporter on this story: Adam Ewing in Stockholm at aewing5@bloomberg.net.

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net.


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