Globalization's Achilles Heel

John Hancock writes on Europe's crisis and identifies the 'Achilles heel of globalization.'
By: /
September 15, 2011

Who is to blame for the financial crisis engulfing Europe - and possibly the world? The frivolous Greeks? The dithering politicians? The hubristic architects of Europe's single currency? All these actors have played a part, but the main culprits – as with America's financial meltdown three years ago – are surely the banks.

Somehow this story has morphed into a morality tale about the folly of the European Union and the bankruptcy of social democracy. This is blaming the victim for the crime. Sure Greece borrowed beyond its means, as did the governments of Portugal, Italy and others. Sure its over-generous welfare state – and sieve-like tax system – was unsustainable. And yes the single currency led Greece, like other euro-zone members, to believe it could borrow endlessly on the same market terms as Germany.

But the real cause of Europe's financial crisis is not government, socialism, or the false security of the euro-zone – it’s the banks who lent so recklessly and lavishly to overstretched governments, and now find themselves facing insurmountable losses if (or rather when) Greece and others default. To focus on the failure of Greece to borrow prudently is to miss the much bigger and systemically critical failure of the banks to lend prudently – and to recognize the risks of Greek debt (even when denominated in euros), given Greece's record of serial financial crises since 1945.

The failure was spectacular. By some estimates Europe's banks are in worse shape than America's. According to the Wall Street Journal, the total debt of the big three U.S. banks (Bank of America, JP Morgan and Citigroup) is $5.86 trillion, or 39% of GDP, while the debts of France's giants, BNP, Crédit Agricole and Société General, amount to euro 4.7 trillion, or 250% of GDP – a suicidal level of exposure concealed up till now by regulators apparently more focused on protecting the incestuous network of bankers, bureaucrats and politicians that dominate French finance than shedding light on the health of the financial system.

This threat of a banking collapse – and an implosion of the financial system - is the gun being held at European governments and taxpayers. The debate now is no longer about how Greece will repay or whether it will default – clearly little more can squeezed out of Greece – but  about who will pick up the tab for the banks' blunders.

Many blame the Euro ‘straight jacket’ for the crisis, arguing that it prevents Greece from devaluing its ways to economic health.  But how would returning to a drastically devalued Drachma improve banks' balance sheets, the core of the problem? Devaluation is just default by another name. Others point the finger at the E.U., arguing that its rambling, decentralized structure has made policy coordination difficult and left no one institution in charge. But how would dismantling the E.U. – disintegrating Europe- improve coordination and efficiency?  Back-to-the-future proposals are a recipe for even more chaos.

Besides these debates obscure the real question - what to do about the banks, the Achilles heel of globalization?  Despite Basel III, despite G-20 pledges, despite promised domestic reform, we still find ourselves in a world where spectacularly ill-judged decisions by too-big-to-fail banks threaten to bring the world financial system to its knees – and to unravel not just European but global integration.

Thomas Jefferson supposedly claimed that ‘banking institutions are more dangerous to our liberties than standing armies.’  As the global economy stumbles again – for the second time in just three years - it's hard not to be reminded of his warning.

Photo courtesy of Reuters.