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.
Different countries are reacting differently to struggling banks, too. Some have been nationalized, others recapitalized by the state or a consortium or bought by wealthy investors. Now some countries, among them Britain and France, are floating the idea of taking national stakes in banks to restore confidence, shore up balance sheets, and then refloat them to recoup the taxpayers’ investment at a later date.
Carsten Brzeski, an economist for the Dutch bank ING, says the problem is that investors are unimpressed at the piecemeal responses. “Some of the measures were not so bad, but the timing and the lack of coordination were a problem,” he says. “If there had been some coordination in advance, we wouldn’t have seen the [market] conclusions.”
Analysts say there could have been greater coordination on:
•Deposit guarantees. Reassurance could have been greater if EU countries had established a rule early. It is unlikely they would have gone as far as the Irish blanket guarantee, as the cost would have been prohibitive. But an early decision to raise the guaranteed savings threshold might have injected confidence into the market.
•Regulation, capital adequacy, supervision, and credit ratings to spread risk more evenly throughout the EU. As it is, Spain is congratulating itself for its minimal exposure to the subprime fallout, while Germany and Britain are wincing.
•A capital injection into banks. Daniel Gros says that if every EU country placed a sum equal to 2 percent of GDP with the European Investment Bank, it would have a fund of 300 billion euros to buy stakes in troubled banks.
Mr. Gros says this response would demonstrate the very purpose of European unity: that everyone would benefit from a holistic solution.
The problem for Europe is that the EU doesn’t have the same federal institutions that the US has. The European Central Bank operates only on behalf of 15 out of the 27 EU countries, and aside from that, there is no central fiscal or regulatory authority.
“What the US can do because it has central fiscal authority [is] get into the game of ensuring solvency,” says Katinka Barysch, deputy director of the London-based Center for European Reform. “We can’t do that. As a result, in the middle of a crisis, we don’t have the mechanisms available, so it means we can’t do a European bank bailout.”
In Europe’s defense, Ms. Barysch argues that there has been some good multinational cooperation, such as with the rescue of crossborder banks Fortis and Dexia. “Think about what would have happened if you had a bank based in El Salvador, Venezuela, and Uruguay that went bust. It would have been mayhem,” she says.
But with countries increasingly determined to rescue their banks by taking state stakes in them, Europe is taking a giant stride back from decades of closer financial integration that saw multinational banks build and grow. “Banks are becoming more national,” Barysch concedes.