Yet another subject of worry is whether the global financial crisis will fracture the EU fatally. While the ECB coordinated rescue of Fortis was a positive sign, Ireland’s move to guarantee all bank deposits was a blow, since it is drawing funds from EU institutions to Irish ones. French president Sarkozy had proposed a 300 billion euro rescue program (an idea that seemed to elicit more surprise than enthusiasm), but that idea was effectively deep-sixed by Greece’s announcement today that, following Ireland, it too was providing a blanket deposit guarantee.
From the Times Online. I’ve left much of the detail in because it shows how hard it is for governments to respond in market time:
Plans for a pan-European response to the global financial crisis lay in tatters last night as Greece followed Ireland in unilaterally guaranteeing all bank deposits.Amid reports that Greek depositors were rushing to withdraw their savings, Greece’s Cabinet agreed to protect all deposits whatever their size. Previously the maximum guaranteed was €20,000 (£15,600).
A proposal by President Sarkozy of France to create a European €300 billion bailout fund also collapsed, leaving attempts on this side of the Atlantic to calm investor panic and lubricate the money markets in chaos…..
The latest chapter in the story of this piecemeal approach to stabilising the banking system began on Monday evening, when a group of Ireland’s most senior bankers trooped into Government Buildings in Dublin.
It had been a terrible day in markets worldwide and a catastrophic one locally….Thus began the hatching of the explosive plan for a guarantee of all Irish bank deposits. Irish officials worked through the night to cobble together a credible plan.
There was no time to consult other governments, the European Commission or even the European Central Bank. A guarantee had to be in place before ordinary bank branches opened on Tuesday. At 4.15am the plan was completed. The promise would apply to six home-grown banks, and to no one else….
Dublin’s move was having awkward consequences. Depositors on both sides of the Irish Sea were beginning to vote with their feet. Allied Irish Bank reported a surge in new deposits, as did Bank of Ireland, as anxious savers rushed to pull their money from British-owned banks and put it in the six favoured institutions with a rock-solid guarantee.
British bank leaders were furious. Dublin’s move might be good for Irish banks but it was bad for British ones, for whom deposits were lifeblood in such difficult conditions. By Tuesday evening, several banking leaders were putting their concerns directly to Mr Brown, Mr Darling and Mervyn King, Governor of the Bank of England, in a conference call….
By Wednesday, the fury over Ireland’s unilateral guarantee was hardening in the City and across Europe. British banks were incandescent with their Irish counterparts, whom they accused of having deliberately exploited the situation to ring up corporate depositors and urge them to defect to “safer” Irish banks.
The case for an ambitious, co-ordinated response across Europe seemed stronger than ever to some on the Continent. That evening one European government source disclosed that France wanted Britain, Germany and Italy to back a €300 billion bank rescue fund at Mr Sarkozy’s planned summit this weekend.
Within minutes, however, a German government spokesman bluntly rejected the idea in comments echoed by Angela Merkel. Confusion set in as French officials accused Germany of leaking the scheme to kill it off.
By late Wednesday evening French officials were changing tack to describe the €300billion fund as a Dutch idea, which they had always rejected. The Hague said it had no idea what France was talking about
The Élysée announced that a meeting between Mr Sarkozy and Mr Balkenende, due that evening, had been postponed for a day because the Dutch Prime Minister “has a problem with his airplane”.
By yesterday lunchtime, Hendrieneke Bolhaar, a Dutch finance ministry spokesman, said that the idea for a bank rescue fund had come from The Hague after all.
But farce then took over as Mr Balkenende emerged from his meeting with Mr Sarkozy – held after his aircraft started working again – to slap down the spokesman. There has “never been any question of a European fund”. It is all a “misunderstanding”, he said.
Instead, taking up a concept first mooted by Mr Balkenende, Mr Sarkozy is expected to float the idea that each EU country demonstrate that it has at least 3 per cent of its GDP at its disposal to help out in a financial crisis.
One EU diplomat told The Times that early French thinking on co-ordinated national funds had probably been mistakenly conflated into the idea of an EU fund, given that 3 per cent of EU GDP amounts to around €300 billion.
With the fund off the agenda, Mr Sarkozy finally persuaded Mr Brown and Mrs Merkel to meet him, Silvio Berlusconi, Mr Juncker, José Manuel Barroso, the European Commission chairman, and Jean-Louis Trichet, the chairman of the European Central Bank, in Paris on Saturday afternoon.
The official aim is merely to agree on a European plan for tighter investment bank regulation to put to the next G8 summit. Unoffically, Mr Sarkozy would also like a decision on a EU response to the crisis and at the very least an agreement not to follow Ireland’s – and now Greece’s – go-it-alone example.
But there has been little this week by the way of co-ordination to suggest that the plan has a chance.
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At some point, at least the American media is going to have to be a lot clearer about the EU and the eurozone, and stop using the British press for its main information source.
Read the article – the problem with the Irish announcement was that it is threatening the non-euro, non-ECB affiliated British banking system.
The EU already functions with a number of currencies (the pound comes to mind), and the EU is not based on the euro.
Generally, the British media has been reporting on the imminent demise of the EU for generations. And some point, I’m sure that will come to pass, in the same way that all political systems come to an end.
Americans, generally unable to read any language except English, appear to believe the British press simply because it is accessible, not because it is accurate.
London is staring at catastrophe as the last major British industry, that of financial engineering, is on the verge of being wiped out. The EU is staring at a number of major problems, but the odds of it shattering based on currency problems is more British wish fulfillment than reality.
Which is not to dismiss the uncertainty surrounding a number of aspects of the euro’s future by any means. But to the extent that the ECB is merely a renamed Bundesbank, it will continue to follow the same policies that were successful in Germany, still the world’s largest exporter – that is, steadfast in fighting inflation in the face of any and all political pressure, and accepting that the weak and unhealthy parts of the economy need to be pruned to allow the healthy parts to flourish.
Obviously, Germany isn’t the rest of Europe, but France’s franc forte policy before its entry into the EMU was successfully modelled on Bundesbank German policy.
And considering how Germany has retained its manufacturing economy compared to the UK, I’m pretty sure that the ECB will continue to ignore the advice coming from London, not to mention that of the U.S., the world’s largest importer.
This doesn’t mean that the ECB is making the right choices (it is quite possible that none of the choices available are the right ones), or that everything will be fine in the future. What it does mean is that the ECB can see what hasn’t worked, and not follow the same policies. To the seeming outrage of those that won’t benefit from it.