October 29, 2012

Has Europe liquidity or solvency problem? Worse, it has a failed business model.

Sir, Wolfgang Münchau with respect to Europe references two questions: Is this a liquidity crisis only? Or is it a solvency crisis?, “Crutches can prop up the eurozone, but it’s still lame”, October 29. 

Unfortunately to me it is much worse than that. Europe has a business model failure. 

Europe, or more precisely European bank regulators thought that Europe could prosper by having its banks avoiding risks, and set up capital requirements which makes the access to bank credit more abundant and cheaper for “The Infallible”, like sovereigns and real estate, and scarcer and more expensive for “The Risky”, like small businesses and entrepreneurs. 

And that is clearly an unworkable model for nations who have thrived on risk-taking. 

Any European real recovery begins with acknowledging this problem. Otherwise Europe (and the US) will just keep on stalling and falling, with even worse liquidity and solvency crisis coming up.