Silvio Berlusconi isn't the problem. Italy's spending isn't the problem. It's not unions or benefits. The euro zone isn't the problem. Neither are Greece, José Manuel Barroso, Nicolas Sarkozy or Angela Merkel.
The problem is the banks.
For more than two years of crisis in Europe, the blame game has shifted from politicians to workers to central bankers and rating agencies. Round and round we go, like a Fiat on the Champs Élysées roundabout
Banks, on the other hand, have endured some criticism, but they are largely unacknowledged in the notion that the mess makes the responsible nations of Europe (Germany, France and those fastidious Finns) vulnerable to the lazy, unrepentant spenders of Greece, Italy, Spain, Portugal and Ireland.
But when you get right down to it, the problem and its solution ultimately fall on the global banking industry. Banks created a bubble through irresponsible lending that swelled government treasuries and facilitated spending. Banks now hold much of the debt those nations issued. The banks would suffer most should Italy and Greece default—or a bailout prove insufficient.
If the fallout were limited to the banks, we could all just go home and talk about Champions League soccer. Or, as we like to do in America, ignore Europe altogether.
Unfortunately, we've found out the hard way that we live in a world where when one bank fails, it crushes a nation's economy, a continent's and even the world's. Thank you, Lehman Brothers Holdings Inc.
It's not just the failures. Bank bailouts have a similar, if not as potent, effect. Bailouts hamstring banks and squeeze lending. As we all know, credit makes the world go round and economies percolate.
Global regulators tell us there are about 30 of these too-big-to-fail institutions around the world. Thirteen of those institutions are in Europe. The total is 17 if you include the U.K.
Now, consider the sovereign debt the same financial firms hold.
As of midyear, French and German banks had $90.7 billion in exposure to Greece's sovereign debt. To make matters worse, Italian and Portuguese banks had a combined $11.4 billion in exposure, according to the Bank for International Settlements.
Now look at Portugal. Weakling Spain had nearly $85 billion in bank and nonbank exposure to its Iberian neighbor. Germany had close to $40 billion in exposure, and France nearly $30 billion, according to the BIS.
Finally, Germany held $180 billion in Spanish debt, while France had $140 billion. Even the U.S. had close to $50 billion in exposure, with $19.5 billion of that on bank balance sheets.
"Due to the close links among the financial markets of advanced economies, distress of one sovereign can spill over to other sovereigns and banks," BIS researchers wrote. "Contagion may also be induced by banks' claims on non-bank private entities in countries hit by sovereign tensions."
We call this a "sovereign debt" problem, but it's really a bank problem. The BIS notes that banks remain massively interconnected. There's a graphic in the BIS report that illustrates the problem. It looks like a thick spider web or a tangled ball of twine.
What really is striking in the graphic is the size of the U.S. connections with at-risk euro-zone countries. There isn't much in the way of direct exposure. But the graphic also illustrates the deep connections U.S. financial institutions have with Germany, France and Britain. In turn, those countries have significant exposure with every weakling in Europe.
In other words, the U.S. is just a step away from a full-blown financial crisis at a time when it's still trying to dig out from its own.
That's why, when we mischaracterize the problem as being one of governmental responsibility, we come dangerously close to making the same mistake we did when we called the financial crisis the "mortgage crisis" or the "housing crisis."
It's not that those labels are wrong. They just don't get at the heart of the matter. Whether it's a subprime mortgage in Las Vegas or a bond in Italy, the middleman is the bank. The bank is closest to the situation and historically responsible for monitoring credit and risk.
I'm not suggesting countries need to rein in spending or that we need to rethink what benefits or entitlements are necessary for workers of the world. It doesn't mean that austerity or forgiveness aren't important issues.
But if the world is really serious about avoiding financial crises in the future, then regulators are going to have to come together and deal with the undeniable facts: Banks have become too big, too important, too dependent on government aid and too dangerous.
Global banking is necessary in a global economy, but when it becomes more powerful than any nation or any group of nations and governments, then it is incumbent on those nations and governments to alter the balance.
Blaming Mr. Berlusconi is like blaming a mortgage borrower who couldn't pay. Sure, there's some fault, but it takes two to make a deal.
Write to David Weidner
