October 22, 2014

Europe must allow its SMEs to compete on equal footing with its “infallible sovereigns” for bank credit

Sir, I refer to Martin Wolf’s “Reform alone is no solution for the Eurozone” October 22.

He concludes it with: “The eurozone needs to reach a bargain between more reform and extra demand. In doing so, it must recognise that persistent stagnation is a big threat to stability. The eurozone should risk expansion. That is now the safer course.”

But, again, he does not refer to the absolute necessity of Europe getting rid of the risk aversion present in the credit-risk weighted capital (equity) requirements for banks, those which can only guarantee the mediocrity and the stagnation of Europe’s economy.

Why on earth does Wolf not do that? One reason might be that doing so, could put in evidence how the current low interests for Germany and other “infallible sovereigns” are much the result of the fact they are zero risk weighted, and that banks therefore need to hold any specific capital against exposures to them… And so getting rid of what is in effect a regulatory subsidy of government borrowings, would of course dent Wolf’s campaign for Germany to take advantage of “extraordinarily favorable interest rates” in order to “borrow to finance additional public investment”.

This madness needs to be stopped. If Europe is to stand a chance, it must allow its “risky” constituency, like all the medium and small businesses, entrepreneurs and start-ups, to be able to compete on equal footings with the “infallible sovereign” for access to bank credit.

Even without odious regulatory discrimination, life is hard enough for those tough “risky” risk takers we need to get going when the going gets tough. Without them, even the strongest sovereign would end up being nothing.