The macroeconomic and micro-economic integration of Europe has been a prevailing trend of recent years. From a macro perspective, integration has included currencies, monetary policies, competition policies, marketplace policies etc. From a micro perspective, firms of all sizes and stripes have stretched their business across the European market. One of the quiet victims of the credit crunch will be that these trends to European integration will slow, if not change.
Starting with member states, how will the Maastricht criteria of the Euro-zone function in the post credit crunch era? For 10 years, the Euro has been a successful currency despite its members’ nonchalance over adherence to Maastricht criteria. With the unprecedented fiscal deficits that Euro-zone governments are incurring, pressure on the Euro will rise if governments don’t demonstrate discipline.
For example, unlike the Euro-zone, in the UK there is a clear tension between the UK government’s desire to provide fiscal stimulus, lower taxes, and bail out the financial sector on one hand, and the deterioration of the pound as a currency on the other, if the UK government does not adopt sensible financial policies. In the Euro-zone, the strength of the currency depends on the pooled strength (or weakness) of the member states.
If one country cheats by spending too much or taxing too little while the other countries hold discipline, then that ‘free rider’ country will get the benefit of their Maastricht non-compliance without having to pay the price of the currency deterioration, because the Euro will be underpinned by the strength of other members. This tension was feared when the Euro project started and will re-emerge as a real problem.
In the microeconomic world of corporations, the drive towards European expansion and European integration will slow down. The loss of Lehman Brothers and Bear Sterns combined with disruption to other investment banks will reduce liquidity and competition across the European credit and finance markets.
The commercial banks will now be forced to focus on domestic priorities while facing tougher regulation and will have less appetite for European adventures. In the last few years, national champions and national rank and file firms have pursued international strategies. That expansionism will be quickly trimmed. What does this mean for the UK and European credit industry?
It means a much slower, traditional, retreating environment. While there will be market opportunities for those with capital, such European adventures will become the exception and not the rule.