EU struggles for unified response

London

So much for European unity.

With banks teetering, its financial system seizing up, and citizens beginning to fret about their savings, the European Union is struggling to produce a united, coordinated response that can restore confidence.

For more than 50 years, the bloc has built up formidable mechanisms for cooperation, coordination, and closer integration, yet in the face of the biggest-ever challenge to its financial system, the EU appears fragmented as its 27 members fall back on national solutions rather than working together on an EU-wide response.

Individual countries are scrambling to guarantee their own savers’ deposits, drawing anger from neighbors who say it is unfair and against EU rules. Leaders are squabbling about whether to mount a “Paulson plan for Europe.” A weekend meeting of leaders from France, Germany, Britain, and Italy not only snubbed the other Big Five country, Spain, but produced little of substance.

The market response? European markets are arguably suffering more than any others at the moment, enduring their worst day for a generation Monday. The FTSE 100 index saw its biggest-ever points loss. On Tuesday, European stocks saw some modest gains.

“This is a once-in-a-lifetime, totally extraordinary event for which the [EU] project was not prepared and so far it’s been pretty bad in terms of a European response,” says Daniel Gros, director of the Brussels-based Center for European Policy Studies. “They have concentrated on saving their own national problems one at a time. That has done nothing to alleviate the systemic problem: that banks don’t trust each other.”

Howard Archer, an economist with the Global Insight forecasting group, adds: “At the moment it seems a pretty fragmented approach with countries coming up with their own solutions, which can cause problems for other countries. It needs a more coordinated approach.”

“At times of crisis, national interests seem to come to the fore,” he adds. “That always seems to happen. There are signs that the European institutions aren’t working well enough to coordinate a response on this. It’s something they need to improve.”

Take Ireland. When it moved last week to guarantee all deposits – retail and wholesale (i.e., guaranteeing savers and all other creditors) – at six national banks for two years, the initial response was relief. But only in Ireland. Elsewhere, countries fumed that the move contravened EU competition rules, skewing the playing field. Britain was particularly alarmed that savers and businesses would take one look at the Irish guarantee and shift their funds out of British banks. Some in fact already have.

Other countries looking on have quickly responded. Some – Greece, Denmark, and Germany – offered full guarantees to retail savers. Others, Britain and Sweden among them, are raising the threshold to which savings are guaranteed. On Tuesday, EU finance ministers agreed that all EU savings up to 50,000 euros ($67,902) should be guaranteed. That raises the European minimum but felt short of the 100,000 euro threshold some nations sought.

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