A Three-Pillar Firepower to Solve the European Sovereign Crisis: A last chance!
A Three-Pillar Firepower to Solve the European Sovereign Crisis: A last chance!

Author(s): Rym Ayadi
Subject(s): Politics, Economic policy, EU-Accession / EU-DEvelopment, Financial Markets, Fiscal Politics / Budgeting
Published by: CEPS Centre for European Policy Studies
Keywords: EU; European Sovereign Crisis; debt; economic stability; banking sector; Dexia;
Summary/Abstract: EU policy-makers, led by Germany, have a last chance to work together with the private sector to produce a comprehensive, multi-pillar framework to stop the pernicious spread of economic contagion from the sovereign debt crisis in Europe with its detrimental effects on the real economy and the society. The sovereign debt crisis and the turmoil in the banking sector have become intimately intertwined. Partial cures will not be strong enough to tackle the root cause of the disease, which has macro and micro origins resulting from the close relationship that has developed over decades between sovereigns and banks and been reinforced by the erroneous zero-risk weight treatment of the EEA countries under the Basel regulatory regime. Recent calls to increase core Tier-1 capital ratios (up to 9%) on all European banks without reconsidering the ratio’s design profoundly miss the point. The experience of Dexia, which had a core Tier-1 ratio of approximately 12.1% in 2010, seemingly superior to the 9%, reveals the limits of these capital indicators to assess a bank’s soundness. Therefore, creating unnecessary noise in the market may derail policymakers’ efforts to solve the European sovereign debt crisis.

• Details
• Contents