To the Rescue
October 14, 2008
Recent days have seen European governments galloping to the rescue of struggling banks, approving mergers and announcing billion-euro bailouts. In the process, they've threatened to ride roughshod over the European Union's strict limits on state aid to the private sector.
That is the view of Neelie Kroes, the commissioner in charge of competition for the EU, who used the Wild West analogy in a sharply-worded speech in Brussels on Monday, Oct. 13. An anything-goes atmosphere would be a “recipe for chaos,” Kroes warned.
Yet it’s unlikely that Europe’s financial crisis will turn into a Spaghetti Western. In the long run, the banking crisis will likely mean more unity in Europe’s financial sector, say leading economists and EU banking experts.
In crisis mode
The top priority for EU leaders in recent days has been to unfreeze the credit markets. All other concerns have taken a back seat.
More than a half dozen European countries announced bailout plans Monday, with Germany alone putting together a rescue package worth as much as 500 billion euros ($671 billion).
“The agenda is dominated by crisis management. Everything is suspended until we're out of the crisis,” Iain Begg, an expert on EU policies and fiscal issues at the London School of Economics, told Deutsche Welle.
Yet after the immediate crisis stabilizes, Europe will need to take a broader look at its banking sector. Improving competition and regulation were issues before the crisis and now have become even more so, Begg and others said.
Finding a solution
Even as European governments announced 1.4 trillion euros in guarantees and other emergency measures, they stopped short of a one-size-fits-all bailout. Specific actions were left up to individual countries and no Europe-wide fund has been established to help other countries' troubled banks.
Still, that level of unity was remarkable for the euro area, said Nicolas Veron of Bruegel, a European think tank devoted to international economics.
“What is sure is that the Europeans have reacted quickly to the crisis and that was not a foregone conclusion,” Veron told Deutsche Welle.
European markets reacted positively, jumping 9 percent on Monday.The hope is that government guarantees will help banks overcome their reluctance to lend money to one another.
Opening up competition
Yet Veron cautioned against the idea that the road ahead would be easy.
“What was announced yesterday will not magically solve all the problems,” Veron said. “The implementation will be very difficult.”
A few hours after offering up her Wild West criticism, Kroes made public rules for EU member states to follow when rescuing banks.
All banks which operate in a country have to be covered by guarantees, Kroes said. This is an implied criticism of Ireland, which on Sept. 30 proposed covering only deposits in Irish-owned banks. The government has since revised the proposal to include non-Irish banks.
“We've had problems with competition in Europe for a long time. Most European bank markets are heavily dominated by national firms,” said Fredrik Erixon, the director of the European Center for International Political Economy (ECIPE), a think tank dedicated to trade and other international issues of importance to Europe.
Yet multinational banks pose their own set of problems, Erixon and others point out. Who would pick up the bill for bailing out the British subsidiary, say, of Spain's Banco Santander? Or who would come to the rescue of the Spanish arm of Deutsche Bank?
And would it be enough to tighten regulations on European banks? Erixon said the worry is that people would then shift investments to Asia and the US where regulations didn't exist.
Economists just don't know exactly what the upcoming days and months will bring.
“We are still in the phase of crisis reaction,” Erixon said.
It's an ending that remains to be written.