Economic Outlook: Let's get radical

By ANTHONY HALL, United Press International  |  June 26, 2012 at 10:44 AM
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Leaders in the eurozone could take three radical steps forward in a hurry but are unlikely to get much further than that.

It would take but a rule change to allow the international fund facilities for bailouts to go directly to banks rather than to governments, which would have to add the billion-dollar aid packages to their debt burdens.

The idea bouncing around Brussels is to aid banks directly, but German Chancellor Angela Merkel thinks that's a bad idea. German taxpayers, she says, would not have any control over the money tossed at banks struggling in Spain, for example, where a massive property boom went bust. That's not Germany's fault. Besides, handing money to banks has not been the best way to secure confidence in voters.

From the point of view of popularity, bailing out banks has proven to be a lead balloon. One week a bank is desperate and about to the collapse. The next week, wary of a change in his job description, a top executive retires with a multimillion-dollar compensation package that is legally nailed in place. Rewarding bankers for failures has not gone over very well with the public

Bailouts for banks have proved a losing proposition for anyone expecting to add stimulus to the economy. Banks know what to do with cheap money -- they invest it where the returns are higher than their interest payments. Banks like free money. A billion-dollar loan for a bank is no different than a new credit card offer in the mailbox with zero percent interest for the first six months. It's not really a great idea, but it's better than a few others.

But Merkel is simply grandstanding to say loaning to banks cannot be done without major overhauls of treaties. The reason it cannot be done is because the eurozone is not unified -- one of the principles Merkel enjoys waving around as the reason for saving the euro in the first place.

It would also be feasible for the European Central Bank to take a stronger role as the international regulator of choice for the currency region. With monetary policy backing it up, the ECB would have more leverage as a regulator.

Merkel says she is looking for control of national budgets. With strict rules for a bank bailout and a stronger regulator in place, she could get what she is looking for although in not the same format she expected.

Along with a stronger regulator and bailout funds going directly to banks, leaders in Europe could take a third radical step, which would be to assemble an international insurance fund to protect European bank deposits.

Saving investors from losses means the international community does not have to decide which bank executives get a raise this year and which ones do not. It cuts right to the heart of the matter. A bank is a building. A depositor is the lifeblood of that building. A depositor can move across the street to a healthier bank if deposits are protected.

Creating region-wide eurobonds would likely take far more time than Europe has at the moment. Gaining oversight of national budgets through a central authority would take far, far longer than that.

Not easy -- but relatively speaking, bailing out banks, protecting depositors and giving more regulatory strength to the ECB could all be done in short order -- in short order for the eurozone, that is.

In international markets Tuesday, the Nikkei 225 index in Japan fell 0.36 percent while the Shanghai composite index in China was flat, dropping 0.09 percent. The Hang Seng index in Hong Kong rose 0.45 percent while the Sensex in India added 0.14 percent.

The S&P/ASX 200 in Australia slipped 0.36 percent.

In midday trading in Europe, the FTSE 100 index in Britain rose 0.38 percent while the DAX 30 in Germany added 0.3 percent. The CAC 40 in France gained 0.16 percent while the Stoxx Europe 600 rose 0.28 percent.

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