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George Osborne, Britain’s chancellor, on EU to put its own house in order in 2011

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George Osborne, Britain’s chancellor, on Wednesday urged Europe to put its own house in order in 2011, calling on eurozone countries to decisively underpin the euro and finally sort out the bloc’s fragile banking system.

Mr Osborne, writing in the Financial Times, says Europe has not been bold enough in its response to its currency and banking problems, leaving a shadow hanging over recovery. The chancellor calls on Europe to restore confidence by tackling deficits and adopting supply-side measures to boost growth, but he says eurozone members must also agree a “comprehensive package” early this year to restore confidence in the euro.

“The sense of crisis may have eased, but wide spreads and high market interest rates still stalk several European economies”.

he writes, ahead of an economic conference in Paris. The last round of stress tests, in July, in which 84 of the 91 banks scrutinised – including Bank of Ireland and Allied Irish Bank – received a passing grade have been widely discredited, amid lingering concerns about banks’ exposure to other struggling European economies. 

“It is revealing that the tests conducted last July identified a capital shortfall of just €3.5bn yet less than six months later Irish banks alone required 10 times that amount”

In his FT article, Mr Osborne also says he is determined that Britain should remain a global financial centre, warning Brussels against hobbling it with “badly thought through regulation”.

He renews his call for an international consensus on the implementation of the global “Basel III” package of bank capital reforms.

But, as Robert Peston has pointed out, the Chancellor did not raise any concerns when the EU stress tests came out. He was complicit in the exercise of trying to sweep the troubles of European banks under the carpet.

Osborne says that “Europe cannot repeat the same mistake”. Yet the Chancellor himself seems to want more of the same:

“The new stress tests must be much tougher. They should cover  a three-year period and look at liquidity as well as core tier 1 capital”.

The fatal flaw in the stress tests, indeed in the whole European Union response to the crisis, has been the official insistence that the banks are suffering from liquidity problems, rather than solvency problems. Ireland’s banks turned out to be insolvent, not illiquid.

Europe needs to face up to the fact that a number of its banks – stuffed with eurozone periphery debt – are likely to be bust and take action accordingly. Trying to reassure the markets with more phoney stress tests that the authorities have decided in advance banks will pass will not work.

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