Europe's problem continues. And its nature changes as it continues. The other day the issue was about BNP Paribas. Everyone's heart almost stopped when the credit rating dropped. It seems now we have come to see what the fundamentals of this issue is: the Committee of European Banking Supervisors (CEBS) is going to measure and publish the stress of twenty-five banks. It did this in October, 2009, most recently, and now it's going to do it again. Spain has already announced that it was going to publish a similar test for its banks. Now wait for this 'How much pressure is on the banking balance sheets of Europe?' test of CEBS to cover all banks, instead of only those twenty-five. Wolfgang Münchau was talking exactly about this, this week, in Financial Times. Why is it so? For a very simple reason: Europe's problem is essentially the banks of Europe. Apparently, the public debt stock problem and the Greek matter are just the tip of the iceberg. Here's what's at the bottom: the banks that used to be the engine of the economic integration in post-World War II Europe, are now being interrogated. The decisions of the banks are being questioned. It seems that Europe's problem will only be solved if this interrogation is completed in a transparent manner. From this perspective, the basic problem of Europe seems to be the designing of the convergence process, itself. This isn't a simple belt-tightening matter. This is questioning the enlargement process of the EU, as a whole. The banks aren't actually the ones being interrogated, the enlargement process of the EU, is. That's why every country that has been a part of the enlargement process concerns the EU. Period. The matter is closely related to Turkey. Period. Those of you who wonder are welcome to join me down the article, ladies and gentlemen.

The Bank for International Settlements, who is considered the bank of the central banks, already published the data it collects from the balance sheets of banks. According to this, the sum of the Spanish risk that the German banks carry on their balance sheets is almost 200 billion dollars. What does this mean? This means that the German banks have opened up a 200 billion dollars credit account for the Spanish. Similarly, a 175 billion dollars account for Ireland and 50 billion dollars one for Greece and Portugal. What's the total? The sum of the risks the German banks carry in their balance sheets related to these four countries is 500 billion dollars. What does this imply? This implies that the German Banks have invested a sum of 500 billion dollars in public and private sector debt instruments in regions which aren't under the control of the economic policies of the German government. This sum equals to about 20% of the German national income. Back to the banks of France. The sum of Spanish risk in the balance sheets of French banks is 250 billion dollars. French banks also carry a risk of 80 billion dollars for Ireland, 100 billion dollars for Greece and 50 billion dollars for Portugal. The sum, once more, is 500 billion dollars. And this equals to about 25% of the French national income. From this perspective, the sum of the funds enabled for these four countries by other banks of central Europe is about 2 trillion dollars.

So, what should we understand from this? With the enlargement process of the EU, the newcomer countries have all of a sudden become 'inside', while they were considered 'outside', up until yesterday. The funds transferred to those countries that have been called 'outflows', have all of a sudden become 'inflows'. Why has it become like this? Because transferring funds inside 'one' country whose regulations, policy execution abilities, reporting standards and public-enlightening standards are the same, is much easier than transferring funds outside. Note that the aforesaid four countries have these similarities. Before having been included in the Union, they did not have the same standards at all, but they did, after that. Ireland, Spain, Greece, Portugal, have become members during the first stage of the enlargement, the other countries during the second. After having become members, the fund transfers to those countries from the banks of Europe increased. The regional savings rates of these countries dropped. Their current account deficits rose. They were way behind the others. They had a lot to do. Suddenly, the resource got plenty. Their investments exceeded their national savings. They no longer had to save because now they were members of the Union. At least not this generation had to. Thus, they didn't.

Now, what's being questioned is this convergence process, itself. But why are all eyes on Greece? To me, Greece is a symbol in this discussion. Symbol of what? Greece symbolizes that the 'insider' and the 'outsider' are not (can not be) the same. It symbolizes that even though the enlargement process, with a political decision, let a country in, and even though it did this thirty years ago, that country doesn't suddenly drop its status of being the 'outsider'. When the balance sheets of the banks are considered from this perspective, it is possible to see the existing discussion in a clearer and more evident way. What Wolfgang Münchau tried to stress while he said 'there is Spanish risk over there', is this: You included these in your balance sheets as if they were German risks but these countries have not (could not) become Germany just because they became members. I think this is what the matter is all about. The question is, how much damage this inspection process will cause to the balance sheets.

Are you aware where this road leads to? I see two paths. Here is the first one: This discussion will soon and inevitably turn into one where it is questioned who carries how much of the risk of the newest member. We will soon be talking about the Balkans again, including Bulgaria and Romania. Please remember that Ollie Rehn said, 'the accounts of Bulgaria need to be inspected', the first week of June. Here is the second path: It is inevitable that turning the 'outsider' into the 'insider' will have a new set of rules. The convergence process of the EU can not any more be managed with a 'relaxed' attitude, like it is used to.

Turkey now has a much more difficult process ahead on the road to the EU. The EU will, from now on, make it even harder to let a country as big as Turkey, inside, without comprehensive, structural reforms and the supervision of the IMF and the World Bank. Political membership to the Union doesn't seem possible, any more.

This is what I understand from the banking problems of Europe. Only a certain part of this problem is related to the public debt stock. The matter is closely related to digestion capacity. Greece's full-membership date is 1981. Now we can see that Greece is obviously not digested, yet.

This commentary was published in Referans daily on 24.06.2010