Separation anxiety

They posed for photographs in front of France's Elysée Palace and quickly went their separate ways.

The leaders of Germany, Britain, Italy and Luxembourg had answered a summons from French President Nicolas Sarkozy, whose country holds the European Union's rotating six-month presidency through Dec. 31. Their task: to demonstrate European leadership amid a global financial crisis that had already claimed a host of European casualties, including Dutch-Belgian financial services group Fortis SA/NV, German lender Hypo Real Estate Holding AG and the U.K.'s Bradford & Bingley plc.

A day earlier, President George W. Bush signed the $700 billion Wall Street bailout package into law. In the run-up to the Oct. 4 Paris meeting, there was much speculation about a similar -- and united -- European response to the crisis. It didn't happen. German and Luxembourg leaders forced a rapid French retreat before the idea ever got off the ground. In the end, leaders informally agreed to ease accounting and competition rules, bolster financial oversight and "coordinate" on national measures -- Brussels jargon for 27 countries acting independently.

Continue reading below

---

Bank nationalizations, quasi nationalizations, bailouts, capital injections, deposit guarantees -- all have been adopted in various ways and at various times, and still credit markets remain frozen and the crisis rages on. At press time, as leaders of the G-7 nations prepared for a weekend meeting in Washington, the prospects for unified European action appeared remote.

"While there is recognition that the crisis is very serious, I don't think there is the political willingness to tackle this at the European level," says Charles Wyplosz, an economics professor at Geneva's Graduate Institute of International and Development Studies. In a widely circulated petition, he and a group of his peers argue that Europe's leaders must unite to address the crisis before it spirals out of control or "they may find themselves fighting over how best to salvage the aftermath."

As policymakers navigate uncharted territory, they are mostly crafting fixes to domestic emergencies.

In a forceful response to the global credit crisis whose effectiveness remains to be seen, the U.K. government on Oct. 8 launched a sweeping bank rescue plan. It would pump up to £50 billion ($87.4 billion) into British banks, offer guarantees on new debt and give the state preferred stock in key lenders. Prime Minister Gordon Brown and Finance Minister Alistair Darling believe that by underwriting an estimated £250 billion of new debt among banks that have signed off on its conditions, it can spur lending more effectively than a U.S.-style bailout designed specifically to relieve institutions of toxic assets. The government's equity stakes, however, will not include voting rights.

Germany, Belgium, France, the Netherlands, Luxembourg, along with the U.K., have all bailed out major domestic lenders, while Ireland, Germany, Greece, Denmark and Austria have guaranteed bank deposits in their countries. The result? A patchwork of measures that critics warn could distort competition and undermine the foundations of a trading bloc that accounts for nearly one-third of the world's gross domestic product.

"In Europe there are two risks related to the financial crisis," says Nicolas Véron, a research fellow with the Brussels-based Bruegel Institute. "Besides the risk of a financial meltdown, which is partly dependent on the U.S., Europe also faces the risk of a reversal of the high-powered financial integration that we have seen over the last few years, which has been extremely positive for the European economy."

With roots going back to 1957, the European Union was grounded on the principle that postwar political integration would foster economic integration. But the current market meltdown has revealed that member states' economies are far more integrated than their political structures.

Dealing with the chaos at hand, governments have scrambled to reassure savers within their own borders.

On Oct. 2, Ireland's parliament passed legislation guaranteeing 100% of deposits and debts of its six top lenders. Since then, other governments have followed Ireland's lead in guaranteeing bank accounts.

German Chancellor Angela Merkel insists that "each country must take its responsibilities at a national level." The country has promised to guarantee the savings of all private account owners. On Oct. 6, Denmark guaranteed all bank deposits in an agreement with its commercial lenders, who will pump up to 35 billion kroner ($6.4 billion) over the next two years into a fund to insure depositors against losses.

Italian Prime Minister Silvio Berlusconi has also promised to guarantee deposits, while No. 1 lender UniCredit SpA plans to raise up to €6.6 billion ($9 billion) in new capital.

Outside the EU, Icelandic Prime Minister Geir Haarde said "it is every country for himself" in unveiling a government guarantee of domestic bank deposits. The small island nation, whose growth has been mainly funded by external debt, has nationalized its two largest lenders as it hovers near bankruptcy.

Many EU governments have been forced to bail out major financial institutions. In the space of 10 days, the U.K. nationalized Bradford & Bingley and arranged the sale of the mortgage lender's most attractive assets to Spain's Banco Santander SA; Germany agreed to a €50 billion rescue package for commercial property lender Hypo Real Estate after an earlier bailout failed; and Belgium engineered a €14.5 billion sale of Fortis' Belgian operations to France's BNP Paribas SA, after the Netherlands had nationalized its Dutch assets. The moves undid a joint Benelux €11.2 billion bailout a week earlier.

The Belgian move, announced late on a Sunday, came amid widespread criticism from domestic quarters over the "Dutch revenge" and resentment at The Hague getting Fortis' and ABN Amro's operations in that country for a mere pittance.

"Fortis: Everyone for himself," declared an editorial cartoon in Belgium's La Libre Belgique daily newspaper, which reworked the Fortis brand logo featuring a kaleidoscope of boldly ­colored geometric shapes meant to depict the diverse communities served by the group. In the paper's spoof version, half the shapes are the colors of the Belgian flag, the other half those of the Dutch flag.

In finding a private buyer, and a French one at that, Belgium one-upped its larger northern neighbor and ended the short-lived chapter in cross-border congeniality.

At the other end of the spectrum, Franco-Belgian Dexia SA insists that it will not need additional funding after receiving a €6.4 billion multinational bailout from the French, Belgian and Luxembourg governments.

Through the crisis the European Commission has been a visible, if not especially forceful presence. President José Manuel Barroso has publicly called for a "European solution" to the financial crisis.

Neelie Kroes, the EC's competition chief, says regulators will approve rescue measures for banks "very quickly," as it did with Bradford & Bingley, while insisting that the EU's competition laws should continue to be respected. Such words should reassure antitrust lawyers such as partner Michael Schütte of Howrey LLP's Brussels office, who argues that "during a crisis, it is even more important that member states respect the rules."

In many ways, the current situation reveals Europe at its best and worst -- lightning-speed reflexes but no common vision.

"Crises are the ultimate test of true leadership," argues the Bruegel Institute's Véron. "These are times when defensiveness, grandstanding and brinkmanship are not the best hallmarks of leadership. This applies equally to EU member state governments as to the European Commission."

Post a comment

Name:

Email Address:

URL:

Remember personal info?

Comments: (you may use HTML tags for style)

Please only click "Post" once. It may take a few moments to process.