Europe discusses common approach to crisis
Yesterday, IMF chairman and former French finance minister Dominique Strauss-Kahn called for a joint plan of action in case the crisis spreads. Strauss-Kahn feels that the lack of a European body which can intervene across borders makes it harder for European countries to deal with the crisis adequately.
But the chairman of the meeting of Euro-zone finance ministers, Luxembourg’s Jean-Claude Juncker, said that Europe does not need an American-style rescue plan. Even without a common rescue plan, European governments would never allow an important bank to fail, he said during an interview on French radio. “European banks are more solid than American banks.”
At a press conference in Brussels on Wednesday, José Manuel Barroso, chairman of the European Commission, also spoke out in favour of a coordinated European approach . This will restore confidence in the banks, he said. Earlier, the Commission proposed reforms to the credit rating system given to banks and financial products. The Commission also wants to see “stronger controls on a European level”. And Barroso again called for a review of top managers’ salaries.
The Europeans have acted quickly and worked together over the past few days. Fortis was saved by the Dutch, Belgian and Luxembourg governments over the weekend and just 24 hours later the French-Belgian bank Dexia was being resuscitated by France, Belgium and Luxembourg.
French prime minister Nicholas Sarkozy, who is currently chairman of the European Council, is organising a meeting of European leaders in Paris this weekend which will be attended by the prime ministers of Italy, Britain and Germany. The chairman of the European central bank (ECB), Claude Trichet, will also be present.
Sarkozy is expected to propose a temporary easing of book-keeping regulations for banks. The meeting will also set the agenda for a G8-conference in November. Sarkozy is expected to meet with the Irish and Dutch prime ministers today.
Meanwhile, with discussions focusing on the longer term, the European Commission has suggested some short-term measures.
In future, banks will no longer be allowed to sell off all their risky assets. They will have to hang on to at least a small percentage of these themselves so that they have a stake in avoiding too many risk-bearing ventures.
The supervision of multinational banks will also be improved, a move that will please the socialists and social democrats who have been campaigning for tighter regulation of the financial markets for a long time.
Meanwhile, German chancellor Angela Merkel urged US politicians to agree to an amended version of the rescue plan that was rejected by the House of Representatives on Monday. Merkel says the new plan is the only hope of restoring confidence.
European trade commissioner Peter Mandelson vented his frustration with members of House of Representatives for their failure to pass the US rescue package in an emotional interview with the BBC. “I think the Americans have taken leave of their senses and I hope in Europe we won’t see parliamentarians replicating the sort of irresponsibility and political partisanship we have seen in Washington,” he said.
In Britain, finance minister Alistair Darling announced that his government will be presenting a comprehensive approach to the crisis. Gordon Brown’s government meanwhile condemned the Irish government’s move to guarantee completely all the savings deposited at its six largest banks. They accuse the Irish of unfair competition.
The Irish move has opened another can of worms: that of state support. For decades, Europe has worked towards the abolition of government aid to encourage competition in the European internal market. Now that governments are supporting banks with public money, all that hard work may go by the wayside.
The European Commission is to look into whether the Irish measure – taken without consulting it – is in accordance with European competition rules. The European competition commissioner Neelie Kroes will also investigate if the rescue deals for Fortis and Dexia have infringed these rules.