February 01, 2012

Martin Wolf, it is the risk-taking austerity we’ve really got to be scared of

Sir, Martin Wolf writes that “Europe is stuck on life support” February 1, and concludes that only shifts in competitiveness between the members will give the latter the opportunity to survive disconnected. Who would not agree, the issue is how to achieve that. It starts by better understanding what caused this mess we’re in and, in that debate, much more important than discussing the dangers of fiscal austerity, is realizing the dangers of risk-taking austerity.

The banks, courtesy of the Basel regulations and the capital requirements based on perceived risk, have now all been painted into the corner of what is officially perceived as not-risky, and where of course any real shifts in competitiveness do not normally reside.

Take for instance Italy, in many ways it has survived in spite of its governments, and, nonetheless any European bank is currently required to have much more capital when lending to an Italian small businesses or entrepreneur than when lending to the Sovereign Italy.

Mr. Wolf, at this moment, much more than a Heinrich Brüning, who we really must fear, are the sissies in the Basel Committee, in the Financial Stability Board and in the UK’s own FSA.