European views on the financial crisis are changing rapidly, but governments finally seem to have settled on a rescue package. Only four weeks ago, my colleague James Joyner noted a conspicuous lack of concern in the European press over growing U.S. financial woes. Deemed for the most part an American crisis, the major European casualties (Northern Rock, Société Générale, and UBS to name a few) had all been invested in U.S. sub-prime markets. However, as European financial institutions plummeted, their entanglement with the U.S. economy quickly became evident. After the passage of the U.S. bailout plan, the mood in Europe has now shifted from a focus on modest internal housecleaning to an eager embrace of financial rescue proposals.
The Irish Question
When an October 4 summit of EU financial leaders in Paris offered little more than “warm words of solidarity,” to quote Wolfgang Münchau of the FT, European countries were left to sort out their own financial messes. Only days before, Ireland had started to clean its mess by guaranteeing all domestic bank deposits, but this led to a strong rebuke by the “Big Four,” who insisted that national governments discuss any financial rescue plans with other EU members before taking action.
However, a similar German guarantee enacted shortly after Ireland’s was less problematic. Spiegel provides the reason why: “After Ireland started the ball rolling, other governments had little choice but to respond given how interconnected the European banking market is.” Oh. It seems acting out of national interest is fine if you have a large economy.
Ireland’s move is significant for two reasons. First, the German about-face shows that national interest quite easily trumps commitment to EU cooperation in matters of finance, which is understandable if not very Europhilic. Such sentiment echoed through Europe until this weekend. Second, the Irish strategy worked; it helped raise liquidity by attracting new deposits, as a frustrated UK watched cash outflows cross the Irish Sea. This put pressure on Gordon Brown to act … and act he did.
Exposing the Limits of EU Financial Powers
As countries continued to follow their own paths after the October 4 summit, the bickering that ensued led the Independent to conclude that European governments were struggling to “prevent the financial crisis from exploding into a political crisis that could shake the foundations of the European Union.” Simon Tilford of the Center for European Reform in London said that the lack of agreement had “exposed the limits of European integration and coordination when presented with a crisis of this magnitude.”
Even beyond the reliably Eurosceptic British press, commentators cast doubt on the prospects of a united EU financial strategy. Luuk van Middelaar of NRC Handelsblad argued, “To find out how Europe acts in a crisis, it is best to look at it not as a Brussels policy-making machine but as a club of member states.” Paul de Grauwe, a Belgian economics professor, concluded in NRC, “When a crisis like this shakes the foundations of the financial system, everybody looks after number one. … If the Netherlands and Belgium can’t succeed in working together to save one bank [Fortis], how will the 27 countries in the European Union manage it?”
Caroline de Gruyter stressed in an NRC editorial that political agreement precedes any economic agreement, stating “The EU guarantee for savings accounts which the ministers finally succeeded in agreeing to shows how difficult it is to create economic union when there is no political unity.” In the FT, Münchau likewise addressed the gap in political and economic commitments of EU member states:
"I shudder to think what would happen when Silvio Berlusconi, Angela Merkel, Lech Kaczynski and the next Austrian leader have to meet to discuss the future of a large cross-border European bank. … For Europe, this is more than just a banking crisis. Unlike in the U.S., it could develop into a monetary regime crisis. A systemic banking crisis is one of those few conceivable shocks with the potential to destroy Europe’s monetary union. The enthusiasm for creating a single currency was unfortunately never matched by an equal enthusiasm to provide the correspondingly effective institutions to handle financial crises."
Good on Ya, Gordon
Now, after an emergency Eurogroup meeting in Paris on Sunday, coordinated financial rescue plans costing a combined €2 trillion will be enacted in Germany, France, Spain, and Austria. Italy, the Netherlands, Sweden, Norway, and Poland also announced similarly timed decisions. The plans are closely modeled on Gordon Brown’s stimulus package for the UK, which calls for adding liquidity to financial markets, capital injections into ailing banks in return for preferred stocks, and government guarantees of interbank lending. Even the U.S. blueprint to buy up failed mortgage-backed securities has been sidelined in favor of Brown-style plans to purchase shares in major banks, “effectively turning the Paulson Plan into a Brown II Plan” the WSJ said.
Only last week, Germany had strongly opposed any EU-wide action, focusing instead on bailing out specific domestic financial institutions. Generally the largest EU money contributor, Germany justifiably did not want to foot the burden of others’ financial mistakes. It had also been critical of Anglo-American capitalism for creating the mess. “The U.S. will lose its status as the superpower of the world financial system,” the German Finance Minister Peer Steinbrück even proclaimed to the Bundestag.
Ironically, the best chance for a rescue now comes from that same Anglo-American sphere. Praise abounds for Brown as hopes return that the EU can act in unison. Writing in the Guardian, Ian Traynor claimed that “European leaders were determined to rise to the challenge of the financial crisis through concerted action, displaying a degree of leadership that put Washington, the global economic leader, in the shade.” Perhaps a bit lofty, but optimistic nonetheless. There is also talk of the whole EU adopting a Brown-style plan at an EU-27 meeting in Brussels on Wednesday.
A Unified Response?
However, the “unified” response ultimately consists of multiple national responses enacted at the same time. As such, the plan still relies on several parties (the countries) living up to their end of a collective agreement, rather than on implementation by a single authority (the EU). This is why Ireland’s decision caused so much anger. When it enacted the bank deposit guarantee, this EU collective agreement was still in place – members were supposed to consult other members, and Ireland simply didn’t. After the October 4 summit, the collective agreement was dismissed as off – each country was to fend for itself. Now, the UK of all places has turned that agreement back on.
There is a message to be gleaned from all these reversals. At some point, the EU's financial authority stops, and individual states begin to put their own interests first: it looks like we now know, or at least are close to knowing, where this point lies. Barring the unlikely creation of an EU financial institution similar to a central finance ministry, with significant powers to intervene in the policies of member states, Europe may have reached the end of its tether in terms of collective regulatory ability. In the short term, an agreement among finance ministers to further extend the EU's minimum bank deposit guarantee would probably prevent members from trying to one-up each other, allowing them instead to move forward with the Brown-style rescue packages. This too is improbable.
In a recent piece for the New Atlanticist, Robert Manning joked that the U.S. government’s push for economic intervention meant that “we are all French now.” First the free market was American. Then the bailouts made us French. For a while most of Europe was certainly not Irish. Now, given the enthusiasm for Brown's strategy, it seems we are all British. Who knows what we’ll be by November. Either way, as the U.S. waits to see if the bailout works its anticipated magic, Europe is finally pulling some financial rabbits out of its own hat, hoping one of them might just work also.
Peter Cassata is assistant editor at the Atlantic Council. Photo credit: Bernd Kammerer, AP Photo.