After several days of market volatility and fevered speculation about the health of Europe's banks, the need to be seen to be doing something clearly became too urgent to ignore for those governments which have banned the short selling of financial stocks.
However, if France, Italy, Belgium and Spain think outlawing "shorting" will answer their problems, they are in for a rude awakening.
For one thing, the crackdown will not work: there are plenty of alternatives for traders who wish to continue betting against these countries' banks. For another, there is no evidence to suggest shorting has been responsible for the wild gyrations we have seen among banking shares this past week. Rather, market data suggest there has actually been rather less shorting of these stocks of late than is typically the case.
The biggest flaw of all in this ban is that it fails to tackle the real issue. Europe's banks have been losing value because investors still do not believe they are sufficiently robust to cope with the eurozone's sovereign debt turmoil. To support these banks then, Europe's leaders must either make them more robust or resolve that turmoil.
When Britain temporarily outlawed short selling of financial stocks during the credit crunch of 2008, the stocks in question subsequently fell more sharply than before the ban. That should not be surprising. Investors bet that companies will lose value only because they judge them to be weak. If the message is that there is no collective will to address that weakness, investors are likely to be even keener to cut and run.
In a crisis, the easy option is always to blame dark forces for your woes. Europe's governments ought to be addressing the still unresolved challenges for the eurozone, rather than worrying about mythical market speculators.Reuse content