European economies could face a lost decade as countries pay the price for years of fiscal irresponsibility, warns a former chairman of the Swiss central bank.
Jean-Pierre Roth, who now sits on the boards of Nestlé, Swatch and Swiss Re and is chairman of Banque Cantonale de Genève (BCGE), said the uncertainty plaguing Europe marked the end of an era that began after the Second World War.
"We are entering now a new phase, maybe with new rules, and we don't know which rules will be implemented, which rules will be defined," he said on a visit to Dubai this week.
"Who is going to introduce those rules? In the past we had the United States dominating the world scene. Now we have a multi-polar world with Europe, a weakened US, China, India, Latin America, so the world is much more complex. My expectation is we are now entering a phase of, I think, large uncertainty, and it can last a decade."
His comments come as European leaders try to save Greece from defaulting on its debts and ensure the continent's banks are sufficiently capitalised to survive a deeper crisis.
European finance ministers appear to be moving closer to a recapitalisation of banks after months of dithering. The IMF has championed a fresh injection of capital into the banks to shore up confidence and prevent contagion from the sovereign-debt crisis.
Angela Merkel, the German chancellor, yesterday said her country was ready to support its banks if such a move were necessary.
"I think it is important, if there is a general view that the banks are not sufficiently capitalised for the current market situation, that one does it," she said in Brussels.
"The German government, as the finance minister has made very clear in the last two days, stands ready to implement such a capitalisation of the banks if it is needed."
In the latestsigns the crisis is spreading from Europe's periphery to its core, Dexia, the French-Belgian financial services giant, secured a taxpayer rescue on Tuesday night after weeks of speculation about its stability. The governments of France and Belgium have agreed to guarantee its debt.
Moody's Investors Service, the global credit ratings agency, downgraded Italy's sovereign rating by three notches on Tuesday, a move that was widely expected but still disconcerting for Europe's fourth-largest economy.
"Italy's downgrade by Moody's overnight, while largely expected, maintains the focus on sovereign-debt concerns and on the repercussions for the European financial sector," Aditya Pugalia, an analyst at Emirates NBD, said in a note.
European stocks tumbled early in the week but recovered some of their ground yesterday. Germany's DAX index was up by about 3.5 per cent in afternoon trading, while France's CAC 40 was 3 per cent higher.
Meanwhile, the so-called troika of the IMF, EU and European Central Bank has sent monitors to Greece to evaluate its position ahead of the release of €8 billion (Dh39.05bn) in much-needed financial aid. The country is expected to default on its debt, which amounts to more than 150 per cent of its GDP, if it does not get another lifeline soon.
Mr Roth, in Dubai to mark the first anniversary of BCGE in the emirate, said it was encouraging that the IMF was involved in sorting out Europe's financial mess but pointed to problems caused by years of poor fiscal management going unpunished.
"What is missing in Europe is market brutality," he said. "That was missing for Greece, that was missing maybe for other countries. In the past with the national currency, if the government were implementing imprudent policy, the market would immediately sanction that with an attack against the currency.
"With the euro, they were able to implement policy without any market sanction."