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Europe's Reluctance On Joint Rescue Plan Could Spell Economic Doom

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BY MICHAEL R. SESIT

Bloomberg News

Published: October 11, 2008

"United we stand, divided we fall" is a phrase attributed to people as varied as the sixth century B.C. Greek author Aesop and the American revolutionary patriot Patrick Henry.

It now threatens to become the epitaph for the bungled attempts by global governments to manage the global financial turmoil. When historians look back at the events of the past few weeks, they will write about the appalling lack of international coordination and cooperation, particularly in Europe.

The one bright spot may be the coordinated interest-rate cut by seven major central banks on Wednesday. But the Federal Reserve-led actions aren't enough to resuscitate a crippled banking system. When push comes to shove, governments act on an ad-hoc, piecemeal basis and, to the detriment of others, largely out of national self-interest.

Take Ireland. Its government last week started the beggar-thy- neighbor ball rolling when it promised to guarantee the deposits and debts of the country's six biggest banks, giving them a funding advantage over their non-Irish competitors. Greece mimicked the move on Oct. 2, followed by Germany, Denmark, Sweden, Austria and Italy.

The world has a systemic problem that requires a broad solution - if not a global approach, at least a pan-European one. First, governments must recognize the need for a comprehensive remedy.

Next, they need bucks, big bucks, to recapitalize large swaths of the global banking system - especially in the West - by purchasing worthless securities, making shareholders and creditors pay.

For that, as famed American bank robber Willie Sutton said, you go where the money is. Today that's Asia, home to more than 60 percent of the world's foreign-currency reserves. China has $1.8 trillion, Japan holds $971 billion and India has $283 billion.

Several individuals, such as Jeffrey Garten, professor of international trade and finance at the Yale School of Management in New Haven, Conn., have argued there's a need for a global monetary authority. Given the growth in cross-border investment, trade and banking during the past three decades, that makes sense. Right now, that may be a non-starter politically.

'Act Rapidly'

Meanwhile, European Commission President Jose Manuel Barroso has called for increased EU supervision and cooperation.

"If the banks and finance houses are international, then the regulators and those who protect depositors' interests must also be able to act rapidly across borders," he wrote on Oct. 2 in the International Herald Tribune.

European governments have shown they can move quickly to rescue small and medium-sized banks. But they seem unwilling or unable to come up with a blanket policy designed to deal with a big bank with a large multicountry presence and to prevent the crisis from spreading.

The U.S. units of foreign banks are eligible for assistance under the government's $700 billion bailout package. Treasury Secretary Henry Paulson urged other countries to adopt a "similar" approach. The initial response was underwhelming, with German Finance Minister Peer Steinbrueck on Sept. 25 saying, "The financial crisis was above all an American problem."

Two weeks later, the United Kingdom and Spain seemed to get Paulson's message and announced national bank-rescue programs. Yet they are only two of 27 countries in the EU.

On Oct. 7, Spain unveiled a strategy to spend as much as 50 billion euros ($68 billion) to buy assets from banks, including foreign banks operating in the country. A day later, the United Kingdom said it would invest as much as 50 billion pounds ($86 billion) in eight major banks - one of which, Abbey National Plc, is Spanish-owned - and that the Bank of England would provide at least 200 billion pounds of loans. The United Kingdom has already nationalized two banks and brokered the sale of a third.

European governments are still eschewing an EU-wide strategy. So far, they have agreed only to make supervision in the region more uniform by 2012 and pledged to cooperate in managing crises. They have resisted coming up with a formula for splitting the costs of a major cross-border bailout, if that became necessary.

Summit Agreement

French President Nicolas Sarkozy hosted a summit meeting last weekend for his British, Italian and German counterparts. The best they could come up with was an agreement to relax accounting rules, EU budget restraints and competition guidelines while toughening financial regulations.

"Each country must take its responsibilities at a national level," Merkel said at a press conference after the summit.

On Oct. 6 and 7, EU leaders pledged to "take whatever measures are necessary to maintain the stability of the financial system" and proposed increasing the minimum deposit guarantee to 50,000 euros. Again, though, they failed to reach a consensus on joint action. There was little support for French and Italian suggestions that Europe create an EU bailout fund.

Too bad. Because the longer Europe resists a universal approach to the credit crisis, the greater the odds it will be confronted with corporate bankruptcies and demands for bailouts.

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