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25-05-2008

ECB, a call for a single European financial system

Those who believe Euro can replace US Dollar as the main currency of reference for international trade should read carefully through Mr Trichet statements: in an interview to the Wall Street Journal the central banker points to problems arising within Europe from the lack of a single financial system.
This is only a part of the problem that would make a Bear Stern like case in Europe far more diffiicult to handle..Bail-outs are usually carried out by central banks by loaning money to the troubled institution or its suitor. This is difficult to control if banking supervision, as in the case of Europe, is left to individual countries. In the worst case scenario, when neither the bank nor a potential suitor is able to repay money lent by the central bank, fiscal policy intervenes by raising taxes, passying the cost of the failure to tax payers.
This land of last resort intervention is impossible in Europe because while monetary policy has been armonized, fiscal policies are not.
While Mr Trichet call is a move in the right direction it is also an admission of weakness.




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