The attractions of wishful thinking
September 29th, 2008
How many lessons do European Union policymakers need before they rid themselves of the illusion that Europe’s economy and financial system are to a considerable extent “decoupled” from those of the US?
In six EU countries - the Benelux trio, Denmark, Germany and the UK - we have seen emergency state intervention over the past few days to rescue or nationalise collapsing banks and mortgage lenders. In each case, the action would not have been necessary had it not been for the financial upheavals in the US.
Yet for most of September, EU finance ministers and other high-ranking officials were at pains to assure us that Europe would be only mildly exposed to any financial contagion emanating from the US.
It wasn’t true then, and it certainly isn’t true now. According to the International monetary Fund, European banks’ aggregate exposure to US subprime mortgages is roughly 73 per cent of the exposure of US banks. Moreover many European banks have become highly leveraged in recent years, leaving themselves with few escape routes when credit conditions tighten and they face unexpected losses and writedowns.
But this is not the first example of European complacency. Last January and February, EU policymakers - such as Jean-Claude Juncker, head of the eurozone’s finance ministers’ group, and Joaquín Almunia, the EU monetary affairs commissioner - loftily dismissed suggestions that Europe’s economy might fall into serious trouble as a result of the US downturn. Europe was more self-sufficient, pursued better balanced policies and was more resilient, was the message.
Less than a year later, the major European economies - France, Germany, Italy, Spain and the UK - are all either in recession or on the brink. Between April and June, the eurozone suffered its first quarter-on-quarter contraction of GDP since the euro’s launch in 1999.
One can sympathise with the yearning of European policymakers to be “decoupled” from the US, in an economic sense. They see it as an affirmation of independence and the basis for a firmer European identity in the future. Some policymakers even seem to speak quite deliberately in terms that put political goals first and economic reality second.
But now reality is hitting the EU hard on the head. The attractions of wishful thinking have never seemed less persuasive.
August 2008








