The Financial Industry: The Obvious Scapegoat for the Euro Crisis

By Noël Amenc, Professor of Finance, EDHEC Business School, Director, EDHEC-Risk Institute

It has become fashionable to blame the financial industry for its alleged role in the current crisis. It is certainly true that the high-flying bankers, who often arrogantly flaunt their big bonuses and academic achievements, are the perfect scapegoats. However, with the facts at hand, it is in the national interest to admit that this search for an ideal culprit is perhaps a bit too simple to be fair.
Having us believe that speculation on the CDS market influences the cost of sovereign debt more than justified investor mistrust about the accumulation of eurozone government deficits, is a rather convenient excuse for European leaders. While they continue to violate the rules on controlling the levels of government debt and spending (which they themselves approved and considered essential when the single currency was introduced), this excuse absolves them of all responsibility in this severe financial and economic crisis.
In fact, the eurozone crisis is not the result of financial speculation, but rather the result of concurrent design, management and communication errors. It is the result of a design error because, in forbidding monetary parity adjustments between countries that do not have the same factors of competitiveness, the eurozone provides troubled countries with no hope of economic recovery, thus forcing their leaders to impose budgetary restraint, which solves nothing in the long-term. It is the result of a management error because the European Central Bank (ECB) is being made to play a very different role than what was specified in the treaties, and as it is being transformed into a constant lender of last resort, the ECB is losing all credibility in its ability to prevent sovereign and financial debt crises. Its capacity to stabilise prices in the long-term is also brought into question. Finally, the crisis is the result of a communication error because, by linking the fate of the euro to that of its debtors, European leaders are implying a degree of financial solidarity that does not and cannot exist, due to a lack of common economic and fiscal governance.

If certain parties chose to lend to Greece at rates of up to 15% rather than to Germany at 3%, it is likely that their probabilities of defaulting were different and factored into the pricing. What good does triggering European deflation do to guarantee that creditors who took risks are reimbursed? What good does it do to damage the ECB’s credibility for the sake of covering the month-end expenses of cash-strapped countries, incapable of reforming their own economies? A currency can always survive the default of an issuer, but not if the institution that is supposed to guarantee its value lacks credibility.
Noël Amenc
Professor of Finance, EDHEC Business School
Director, EDHEC-Risk Institute