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Keynesian policy in Europe for the past three decades has been a mistake

Keynesian policy in Europe for the past three decades has been a mistake

16.8.2012 16:16
Autor: Eva Jarešová, KSB

J.-F. Adelle

During his recent visit to Prague he shared his opinions with KŠB.

KŠB: Greece is still in the eurozone, the Spanish bank sector is still functioning. What is the likely outcome of the current eurozone crisis?

J.-F. Adelle:
It is harder to predict the outcome of this crisis than in the former crisis of 2008. The former crisis was to a large extent very technical. This time it´s different, though the factors of the eurocrisis are well-known. First of all, it´s the overindebtedness of the sovereign countries of the eurozone. Another component is the lack of confidence in European governance to take the appropriate measures. And the lack of proper governance of the eurozone has something to do with the way in which it was built. The euro currency was built without real governance on the monetary issues and huge federal budget, contrary to what happened for instance in the US. There´s none of those in Europe and I think the rating agencies have expressed a corresponding lack of trust. At the same time, the crisis is very political and that´s why it is very difficult to predict the outcome.

KŠB: You mentioned the whole euro crisis was a political issue to a great extent. Breaking the vicious circle would be very difficult. What is the likely remedy in your view?

J.-F. Adelle:
I don´t think there´s just one solution. On the contrary, there´s a number of solutions. One is to maintain confidence, as it is the key element. Another solution is having a higher integration and higher community budget, more supervision on national government spending including accounts. Also looking at rating agencies might be a good idea. Breaking a thermometer when you want to cure the patient isn´t a good idea. On the other hand I think rating agencies sometimes play a bit on the political agenda. But the essential measure is a return of growth. In my opinion, it was a mistake to apply a Keynesian policy in the last 30 years in most European countries. Because the Keynesian theory is that you create growth with an imbalanced budget. But it only works if overspending creates more economic activity that generates more taxes, and therefore the government gets more than it injected to the economy. The problem of the EU was that the growth rate was no longer there. And if there´s no growth, the deficit is killing.

KŠB: Could you outline the changes in rating agencies in more detail?

J.-F. Adelle:
I´m not very familiar with the details of the project. At the moment I don´t think it would be a successfull thing to have an offical EU rating agency. The key to the rating agencies´success is their independence from any institution that is being rated, including the states. All rating agencies are independent and they are financed by payments of those who want to be rated, especially the corporates and the banks. But when you realize that there´s no decent rating agency in Europe at the moment, whether independent or not, the idea of creating an independant European rating agency might be a good one.

KŠB: What questions about the eurocrisis do you currently hear most often from you clients, such as banks or investors?

J.-F. Adelle:
Let me first say that addressing the risk of the breakup of the eurozone isn´t so much a politically correct subject at the moment. It started to be a real subject in the fall 2011 and after that, because the governments, especially in France, exerted some pressure, the banks have received instructions from the government on what to do in the event of a eurozone breakup but they are to keep such instructions in their safes, so to speak. On the other hand, the corporates may behave differently. What they want to do is to reduce the exposure to weak countries that may leave the eurozone and in particular Greece. So that may effect their centralization schemes. The second aspect is less the direct fear linked to either disruption in the market or the risk of breakup rather than the already effective impact of the crisis on the banking model. The banking model used to be at least in France that the banks accounted probably for the two thirds of the financing needs of the corporates and the infrastructure. But due to the crisis, three major French banks are going to reduce their balance sheet by one half between August 2011 and the end of 2012. That´s a big change. So obviously they can no longer lend the same volumes as before. The reduction of loans has already been 7 pct since last August, which is of course important on the economy. The change in the model is that because they loan less, other players need to be supplying credit to the economy. That is supposed to bring a new banking model that is called „originate to distribute“, in which the banks originate and structure the loans, but they do not fund them.

KŠB: So they will serve as a sort of intermediary?

J.-F. Adelle:
They will be refunding from other sources and they will be continuing to service the loan as they have the expertise, they know the clients and they have the track records. But they will divest the funding to other entities, such as insurance companies or funds. And this is already on its way, though it will take time.

KŠB: The changes you just mentioned are quite profound. Will these structural changes stay even after the crisis ends, or are they just a temporary shift?

J.-F. Adelle:
The answer is probably both. The old world will not come back. At the same time, the banks will probably regain some strength. What will not come back is the fact that at least in Europe the banks accounted for such a huge portion of the financing needs of the economy. In the US the model was already different. The model was that banks accounted probably for not much more than one third of the financing needs. The markets, both equity and debt markets, were much more dynamic. And also the regulation of banking monopoly is different. The banks were to a large extent very protected in Europe, in particular in France. So that model will not come back. There´s also a human factor. Those who will regain strength and power will continue to be those who attract the best people. And those who attract the best people are those who pay them most. I tend to believe that investment banks in one way or another will continue to be on the top again because this is what they have to do.

KŠB: You also say that the eurocrisis will lead to the rise of islamic banking in Europe. How substantial will this shift in your eyes be? Do you already see it happening?

J.-F. Adelle:
In France, the efforts of the French government to accommodate Islamic finance in our legislation, in particular tax-wise, started with the first crisis in 2008. Now there´s obviously a need for cash, in particular in this new banking model. The sovereign funds from the Gulf countries are very wealthy and they promote Islamic finance. So yes, it will develop. There are now some political fears that it would have adverse political effects in France, considering the Muslim communities. So I don´t think the Islamic finance will develop in retail banking, but the crisis will generally help it, because the crisis will help those who have the capital now. And for certain, it´s not Europe.

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