As the House of Representatives considers another vote Friday on a historic rescue of the US financial sector, attention in Europe is on whether countries here can agree on sweeping reforms to their own tottering banking systems this weekend.
Leaders of Europe’s biggest economies are expected to meet in Paris Saturday for an emergency summit to discuss stricter rules that the European Union (EU) proposed this week and whether Brussels, too, needs to pass some sort of bailout fund to prop up the European economy.
The meeting appears to be a sign that the EU leaders, long thwarted in attempts to create a unified economic policy, believe that only a pan-European response can save the world’s largest economic bloc from sliding into a deep recession.
“European economies are much more at risk,” says Stefan Bielmeier, an analyst at Deutsche Bank. “The US is economically more flexible, and therefore they are better suited to maneuver out of a crisis compared to the Eurozone,” he says.
Major European financial markets, from Germany’s DAX to London’s FTSE, showed slight gains Friday. Economists attribute the minor rally to Wednesday’s US Senate approval of the government’s $700 billion bailout legislation, and anticipation that the House, which rejected the measure on Monday, would soon follow.
There have been calls for the European Central Bank in Frankfurt, which sets EU monetary policy, to cut a key rate currently at a seven-year high of 4.25 percent, but bank officials Thursday decided against it.
On Wednesday, Charlie McCreevy, the EU’s commissioner for internal markets, proposed a broad reform to the European banking system, which would prohibit banks from lending more than a quarter of their funds, force lenders who sell precarious loans as securities to assume more risk, and create centralized oversight for institutions that operate in multiple EU countries.
But the sense that Europe is in an economic crisis persists across the continent, following a week in which the Netherlands, Belgium, Luxembourg, Germany, and Britain rallied to rescue their own failing banks.
The largest, the privatization of Britain’s eighth largest bank, Bradford and Bingley, got swift approval from the EU on Wednesday. The same day, Italy’s lending titan UniCredit, whose shares had been suspended on the Milan stock exchange, announced it was selling some of its property holdings to allay fears about its solvency.
Swiss giant UBS, the European bank hardest hit in the credit crisis, announced Friday that it is cutting 2,000 jobs.
But this weekend the question remains whether the EU can overcome a record of division on other key issues – energy, Russia, and its own constitution to name a few – and find consensus on economic policy. It’s necessary if leaders are to make the kind of sweeping changes that the European financial system needs, which would include creating a EU bailout fund, analysts say.
“The only thing they can do is to take very drastic measures. That’s the only choice they have,” says Karel Lannoo, chief executive officer of the Center for European Policy Studies in Brussels.
Mr. Lannoo says failure to do so will result “in the Balkanization of the European financial markets. Every country for itself. That is the danger.”
Members of the European Parliament are split on how to proceed, with liberal members favoring Brussels’ proposed banking reforms and conservatives saying the reforms involve too much regulation.
EU states are also floating their own proposals to toughen up the overhaul. France, which holds the rotating EU presidency, wants to require greater cooperation among national regulators. Germany is leading the call for a suspension of EU state aid restrictions, which would give countries more financial muscle to help struggling banks.
Leaders are also expected to debate the extent to which governments should guarantee bank deposits, following Ireland’s announcement this week that it would back all deposits in its banks – a move seen as automatically putting other national banks at a disadvantage unless their governments follow suit.
“Where should I go if I have €20,000? To an Irish bank, because I know I’ll get bailed out,” says Olaf Gersemann, a financial columnist for the German newspaper Die Welt.
The EU’s call for more centralized financial regulation is a sharp departure from the way things have always been done.
Unlike the US Federal Reserve System, Europe lacks a central oversight authority for its financial system. The European Central Bank sets policy and is a lender of last resort, but it does not hold any supervisory mandate. Instead, banks in Europe are regulated on the national level: If a bank fails in France, it is up to France to bail it out.
“This has always been a cause for concern,” says Gerhard Illing, research director at the Institute for Economic Studies in Munich. “The question has always been how effective this system is if there are shocks in the international banks” operating in several countries.
“Regulatory reform will take some time. This won’t happen fast,” Professor Illing says.