Europe can't solve this crisis; it's part of the problem

Jim McConalogue, editor of the European Journal, in the Yorkshire Post on 08 October 2008:


Europe can't solve this crisis; it's part of the problem

AS Britain is thrust into the global economic maelstrom, one of our most nerve-racking, soul-destroying problems is the banking crisis and its impact upon the daily lives and financial security of the British people.

Within Europe, Ireland, Greece and Germany have become the first three EU states prepared to guarantee personal savings in their domestic bank accounts, to varying degrees.

However, when we look to the Labour Government for assurances in both the causes and actions in a failing financial system, there appears to be only silence or half-promises.

The responses of Gordon Brown and Alistair Darling – like those of the Heads of State and Finance Ministers of the 26 other EU governments – were located somewhere between confusion, anger and misdirected restoration solutions, prior to last night's bailout of the banks.

For bankers and economic analysts, the immediate question surrounding the crisis may well revolve around liquidity, inter-bank lending in the wholesale market and the response to today's part-nationalisation measures, but it would be naïve to suggest our concerns stop there.

The question about "what to do" and "where to go from here" centres on governance. The eurozone 15 and the larger EU 27, including the UK, must begin to ask the bigger question: why can our own national governments, central banks and treasuries no longer control their own affairs?

The answer really lies in Europe.

Following Britain's own difficulties in rescuing Northern Rock, fixing a deal for HBOS, nationalising Bradford & Bingley, and observing the collapse of European banks (with Germany's massive Hypo Real Estate struggling and the semi-nationalisation of Fortis by the Dutch, Belgian and Luxembourg governments), it is becoming glaringly obvious that European Union rules and regulations were at fault.

For example, the Takeover Code and Market Abuse Directive were at the foundations of the confusion in a potential takeover of Northern Rock (by Mervyn King's own admission) and the rigid "mark-to-market" accounting rules used by all banks to value their assets, again, have their basis in the EU Capital Adequacy Directive. It also explains why the capacity to achieve action through "European unity" becomes something of a joke in the midst of the crisis; the last thing that Member States want is an even tighter stranglehold within Europe (or paying for the misfortunes of others).

At a European summit in Paris on Saturday, French President Nicolas Sarkozy met up with Germany's Angela Merkel, Italy's Silvio Berlusconi and our own Gordon Brown to discuss an EU-wide rescue bailout plan. The French and Dutch wanted a E300bn bank rescue fund – but the British and Germans rejected this plan before the meeting even began. The terms for an EU-wide rescue plan disintegrated in front of the French President's eyes.

Troublingly, the watered-down EU plan, which will be reviewed over the coming weeks, allowed for "exceptional circumstances" under which states may suspend the EU's stability and growth pact demanding a three per cent public deficit limit. In short, there's no EU bank rescue fund but there is an agreement to allow the European Union to become a potentially bottomless pit of public spending at the expense of European taxpayers. Of course, that is what the EU French Presidency terms a victory. The governments of Portugal, Italy, Greece and Spain will be quick to thank Sarkozy for this lifeline.

In the larger political environment, the failure of the EU's rigid economic and monetary union (EMU) will become one of the most noteworthy issues of the entire financial crisis. Why? Because at its heart, Europe has always been wrong to assert that a singly harmonised and regulated European economic landscape with one single currency will work.

It is the doomed economic environment upon which the European banking system rests, particularly for the eurozone 15. And now consumers, taxpayers and voters are paying the price.

Because EU law has broken down, different countries are now going it alone. The EU legal and political situation is disintegrating. The Irish government has guaranteed all deposits in their leading banks (without any consultation). Then Greece followed. Ironically, Germany, who controls every lever of economic, fiscal and monetary policy of the eurozone, via the European Central Bank, herself declared that she will unilaterally guarantee E568bn of personal savings in domestic accounts. There is significant pressure now for Chancellor Darling to follow suit – to offer a blanket savings guarantee across all British banks.

Whatever Darling decides, the Government's plans must not simply be designed to mimic the actions of our German friends, of which the German minister, Wolfgang Schäuble, said on Monday: "We learnt from worldwide economic crisis of the 1920s and 1930s that and economic crisis can result in an incredible threat for all of society."

He is certainly right. We do not require Germany's controlling stance. Britain requires a national solution to the banking crisis which is grounded in redressing liquidity and solvency concerns, cutting regulation, achieving a degree of self-regulation within the City, and which also frees the consumers and taxpayers from a burdensome, choice-less, heavily-debted, overly-regulated social Europe, in the middle of which sits the British banking system.

Jim McConalogue is Editor of the European Journal.
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