While the world waits to see if the US House of Representatives passes the revamped $700 billion financial rescue package, the spotlight on the other side of the Atlantic is on whether the Europeans will follow suit with a package of their own. It is a divisive topic — so much so that tomorrow’s emergency meeting in Paris of the leaders of the four European countries in the G-8 group, called to hammer out a European response, could be stormy.
That the Europeans need plans of their own is clear. The EU economy is bigger than that of the US; last year, its GDP was worth $16.6 trillion compared to $13.8 trillion for the US. The EU banking industry is also far bigger (over half of the world’s 1,000 largest banks are European; just 14 percent are American). But so far, it has been left largely to the Americans to come up with grand plans to solve the global crisis. The European response has been on a case by case basis — two loan banks saved by the British government, Fortis effectively nationalized by the Belgian, Dutch and Luxembourg governments while Daxia, the world’s biggest lender to local governments, was thrown a lifeline by France and Belgium. At tomorrow’s meeting, regardless of which way the vote goes in Washington, the Europeans are unlikely to agree their own “rescue” plan. That is because there is serious dissension, particularly between Paris and Berlin, over the extent to which governments should intervene in the market. Reports circulating in Paris in the past couple of days that the French government wants a $440-billion EU rescue fund to buy up bad debt from European banks, along the lines of the American one, have prompted a scathing response from the Germans. Their view is that the banks have made their own beds and must sleep in them. Germany “cannot and will not issue a blank check for all banks, regardless of whether they behave in a responsible manner or not” — Chancellor Angela Merkel’s words leave no room for compromise.
Given the German stance, little if any time is likely to be spent on the $440 trillion suggestion, supposedly the brainchild of French President Nicolas Sarkozy. (It would be the second of his grand European designs that the German chancellor has torpedoed, the first being his Mediterranean Union, which had to be much, watered down after her objections.) In fact, French Finance Minister Christine Lagarde has denied the report although the suspicion has to be that the French government was flying a kite — putting out the story to gauge reaction. Certainly, she had talked of the need for a European safety net to prevent European banks going bankrupt.
The Germans are not anti-interventionist. But they take a different approach to the crude interventionism of the politicians in Washington, London and Paris, forced to act despite ideological reservations. Berlin wants a return to regulation. Its determination is understandable. A year ago, both Chancellor Merkel and her Finance Minister Peer Steinbrueck warned of impending financial crisis and called for increased regulation in international money markets. It was the Americans and the British who were scathing at the time. Last week, as he laid the blame for the crisis squarely on the Anglo-American free-market model and its quest for ever-higher short-term profit, Steinbrueck was in vengeful mood. The US, he predicted with something akin to glee, will lose its status as the world’s major financial power. If this is the same Steinbrueck who last year, despite Germany’s presidency of the G-8 and the EU, and despite his worries about financial crisis ahead, preferred to go on safari with his family rather than attend the G-7 finance ministers’ summit in Washington, he is probably about to be vindicated. If the summit produces anything it will be a commitment to re-regulate.
