Bank runs coming to Europe?

A definite possibility, says Fortune columnist and former FDIC director Sheila Bair.  If withdrawals massively overwhelm deposits over a short period, bank reserves are depleted and, in the absense of deposit insurance, the last depositors in line are left with nothing.  Deposit insurance is designed to mitigate that risk and in the US it has largely served its purpose.  However, each country in Europe runs its own deposit insurance system and the ability of the Greek, Italian or Spanish governments to take on more debt to bail out their citizens is limited at best. 

A further complication: if a country such as Greece decides to leave the euro, it will end up converting all accounts to drachmas which will no doubt be worth much less than the euros they would be replacing.  Fear of such a currency conversion could in and of itself launch a bank run as Greeks move their assets to safer countries. 

Bair endorses the creation of a EU-wide deposit insurance fund.  We will see how this plays out over the coming weeks. 

Austerity in the EU

Insightful graphic on the well-known econ blog Marginal Revolution about government spending in five European Union members which have been following the austerity path.  As you can easily see, spending in France and the UK has continued to increase every year, whereas spending moved from rapid growth to flatline in Italy.  Government spending has actually fallen in Greece and Spain over the last two years but remains well above where it was 10 years ago.  And these are countries with little to any population growth.