Europe is facing a “true” financial crisis with global implications but confidence in the euro as a single currency remains strong, the head of France’s Central Bank said yesterday.
“We are now looking at a true financial crisis – that is broad-based disruption in financial markets,” Bank of France Governor Christian Noyer told a forum in Singapore. “We are facing a financial crisis, not a monetary one.”
Noyer, a member of the European Central Bank governing council, said that while most observers trace the turmoil to “fiscal imbalances in peripheral economies,” they may have been only the trigger.
And he insisted that the euro was not under threat.
“Confidence in the currency remains as strong as ever,” he said, adding that exchange rates are high by historical standards and gross capital inflows into the eurozone remain unaffected by the turmoil.
He told reporters later that the euro had provided “a lot of benefits and that it would be extraordinarily counter-productive” to contemplate breaking up the monetary union.
Noyer earlier acknowledged in his speech that the global situation “has significantly worsened over the past few weeks” and called for a stabilisation of bond markets used by debt-strapped eurozone countries to raise funds.
“Market stress has intensified. Bond markets in the euro area are not functioning normally. It is essential to stabilise European bond markets,” he said.
“We have to recognise that the necessary degree of fiscal adjustment is heavily dependent on the level of market confidence.”
His comments come as the European crisis threatens to spread to big-name economies including France, which has seen its cost of borrowing soar due to concerns over its banks’ exposure to the sovereign debt of troubled neighbours. And Noyer warned that any financial contagion in Europe could rapidly spread globally.
European banks have been hoarding cash due to fear of exposure to eurozone debt, further straining the financial system.
“Asia may be 6,000 miles (9,600 kilometres) away from Europe but for the financial markets the distance is less than 30 seconds,” Noyer said.
There are fears that the two-year-old eurozone debt crisis that has ravaged Greece and now threatens Italy could break up the monetary union and plunge the world into another recession.
Italy has debt of nearly €2 trillion and must repay about €400 billion next year – about the same amount the European Union and International Monetary Fund gave for bailouts of Greece, Ireland and Portugal.
Noyer said he was confident that “Italy has absolutely the potential to fully honour its debt and is fully committed to do so.”
And he stressed that Europe’s weakness “does not primarily lie in the fragility of any of its components.”
“Europe’s fragility comes from its difficulty to organise and manage, in times of crisis, their complex interactions occurring at the heart of its financial system,” he said.
“There have been lags in the decision-making process. Fiscal discipline has not been respected in the past. European rules have not been implemented (and) some policy decisions have produced unintended consequences.”