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The end of Europe?


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The end of Europe?

Nancy Bush is a veteran bankanalyst. The following does not constitute investment advice, and the views andopinions expressed in this piece are those of the author and do not necessarilyrepresent the views of S&P Global Market Intelligence.

As ifEurope needed one more piece of bad news. With a moribund economy throughoutmost of the Eurozone, a ceaseless flow of refugees from the Middle East,populist political parties gaining strength throughout the continent and thevery real possibility that British voters may vote to scrap their part in the "Europeanexperiment," the latest ISIS hit at the heart of the European governingapparatus in Brussels seems to me to be more than simply their latest gambit ina country still in denial about the growth and persistence of its terroristpopulation. Instead, it seems to be yet one more confirmation of the weaknessof the whole European structure — both economic and political — and is one moreblow to an already-fragile EU.

Letme make an important disclosure here — I am a Eurosceptic, and have been sinceday one. Indeed, I remain amazed that the monetary and political union enactedin Europe in the 1990s has persisted for this long, and my concerns and doubtshave not changed much in the ensuing years. While I can certainly understandthe altruistic intentions that led to the creation of this massive artificialentity — the desire to neutralize the antagonisms and grudges that had led tocountless wars on the European continent over the centuries — the structurethat is now in place tries to artificially dismiss (or ignore) the historicalnational identities that have been in place for thousands of years and thatonce made Europe dynamic and interesting. It seems now to be just static, tiredand creaking at the seams, held together only by spit and by the will of thepresent German Chancellor.

Butit won't be ISIS — or refugees, or Boris Johnson, or Alexis Tsipras — who breaksup the Eurozone. That task has seemingly been undertaken by Mario Draghi, thehead of the European Central Bank, and he seems to be intent on making surethat the economy in Europe stays in some state of suspended animation whereonly central bank action can save the day. All I could think while I waslistening to his surprising commentaryon March 10 (as he announced that the ECB would push negative rates yet furtherdown and would greatly expand asset purchases) was that Europe was dead, or atleast on life support, if that's what it takes to get that economy moving. Inthe meantime, unemployment on the continent remains at astonishing andunacceptable levels, the welfare state grows, and the population — even ofprosperous Germany — grows more restive.

Soundskind of familiar, doesn't it? While the U.S. populace is definitelydissatisfied with the status quo and is ready to throw out the politicalelites, employment is growing (as will wages, inevitably) and there is littlechance that Texas (or California, or New Hampshire) will choose to secede as aresult of popular dissatisfaction. (Yes, the Texans threaten to leave from timeto time, but that's just big hat, no cattle.) But the active debate and lack ofconsensus at the Fed convinces me that the folly of negative rates is not onethat will be foisted upon the U.S. — the desires of the extremist Keynesiansnotwithstanding — and that the American banking industry will thus escape theworst of the damage that is being done to their European peers.

Isn'tit ironic that banking — that industry so reviled by politicians, pundits andMain Street alike — may make the difference between the (relatively) dynamicstate of the U.S. economy and the agonizingly slow growth being experienced inmuch of Europe? While Europe's woes are largely attributed to politics, Icontinue to believe that the Eurozone's original sin was the failure to createa banking union that would come together before the common currency was putinto place. How did Europe's economic leaders think that monetary policy wouldbe transmitted effectively with each nation holding sway over the structure andregulations of its own banking industry? Did they somehow imagine that theGermans would cede sovereignty and authority over their large and cherishedbanks? Or that France would move definitively to fix the structural issues thathave been present for years at SociétéGénérale and BNPParibas, among others? And even the Swiss banking gnomes — thoughnot in the Eurozone and ostensibly smarter than their continental counterparts— seem utterly unable to fix the problems in their large banks. (Witness thelatest debacle at Credit Suisse,the forever-restructuring bank.)

ThankGod for CCAR, is all I can say. Yes, I know that the annual stress test regimenhas grown to be an all-encompassing headache and ever more weird in itsseverely adverse scenarios, but as I have said often before, these tests arethe major factor that separates the American banking industry from the rest ofthe world in terms of credibility and ability to tap liquidity in times ofstress. And while bankers gripe incessantly about the costs of regulation, Iwould pose a countervailing question — how has the perceived rigor of Americanbanking regulation added to the perception of American bank stocks,particularly those of the American community banks?

Letme explore that point here, and please — no nasty-grams as a result. (It'smeant to be a discussion, not a dictum.) I have spent the last nine months orso immersed in the Southeastern community banking industry, and I have beenastonished by the dynamism and the vigor that I have found here — a vigor thatis particularly surprising given the weakened state of Southeastern communitybanks during the residential real estate meltdown. My home state of Georgia wasground zero for community banking failures, and rightly so, and the bankingscene remains somewhat subdued here relative to other Southeastern states as aresult. (The wacky banking market in metro Atlanta remains a puzzle to me, andhas been so for most of my life.)

ButI can also argue that the regulatory zeal in closing banks and merging them —both here in Georgia and elsewhere in the South — has led to a renaissance inour community banking industry. These failed-bank deals gave a leg up to awhole bunch of smart bankers to start the process of using stored-up accretionto move on to acquisitions of other community banks, and if the likes ofPinnacle Financial Partners,BNC Bancorp,South State Corp.,Yadkin Financial andseveral others are any indication, the Southeastern banking industry is just atthe beginning of a reordering that will go on for years and will produce astunningly competitive and vigorous banking scene. Do I think that theregulators here are watching this process closely and will be willing to call ahalt to the ambitions of banks that grow too large, too fast? You betcha — andthus have resulted the astonishing valuations that reflect investor confidencein the ability of these large community banks to grow safely out of communitybank status and to compete on a larger scale.

Mypoint here is that the existence of a growing and healthy community bankingindustry — and the regulation that underpins it — is an important reason thatAmerican growth remains so superior to growth in Europe. Is the existence oftoo-big-to fail banks a problem in America? I can argue both sides of thatquestion, but I can say definitively that the existence of too-big-to-failbanks in Europe where problems never get remediated — and the efforts of thecentral bank to paper over these problems with ever-looser monetary policy — isa growing danger to the European Union and to the prospects for global growth.Do I think that the Europeans will realize the error of their ways any timesoon, and move to fix their banking industry and create a credible bankingunion? I do not — and as we say here in the South, as far as I can see, it'sall over but the shoutin'.