So far, the statement released this afternoon US time out of a Euro summit amounts to an attempt at reassuring hand-waving but in fact was merely a restatement of the status quo. The group of European leaders did agree on a set of principles, but it remains an open question whether they will be able to act quickly or boldly enough in the fact of the mounting financial crisis.
And one principle was troublesome: that each country is on its own as far as its banks are concerned. Some banks, such as Deutschebank and UBS, are too big for their countries to save should they founder. Hypo was brought down by an Irish acquisition. The statement may have been crafted in part to keep pressure on German banks to support the Hypo rescue, and may be a practical necessity right now, since the public at large does not yet recognize the depth and extent of the risk in the EU, but it seems unwise to take a hard position on such a central issue.
From the Wall Street Journal:
European leaders pledged at a weekend summit to protect the continent’s banks from the spiraling global financial crisis. Their resolve is already being put to the test as two European banks required fresh rescues.
At an emergency meeting in Paris on Saturday, the leaders of France, Germany, U.K. and Italy said that, unlike in the U.S. where Lehman Brothers was allowed to file for bankruptcy, European governments would stand in to prevent any bank from failing…..
Yet, so far, proposals for unified anti-crisis rules — such as a mult-billion euro banking bailout fund — have been abandoned for fear they would be impossible to govern. Instead of concrete decisions, therefore, the four EU leaders decided on Saturday to a list of principles. Among them: though the leaders agreed that each country will be responsible for handling problems within its own banking system — including coming up with possible sanctions for the heads of any failed banks — they promised to keep each other informed of their actions.
They said they would jointly consider ways to amend some accounting standards — such as the mark-to-market rule — that have pushed several banks into uncontrolled, downward spirals.
European leaders pledged to bail out their own nations’ banks while stopping short of a regional rescue effort to deal with the global credit crisis.
At a summit in Paris yesterday, leaders of France, Germany, Britain, Italy, Luxembourg, the European Central Bank and the European Commission agreed to ease accounting rules, seek tougher financial regulations and weaken enforcement of competition and budget laws.
“Each government will act according to its own methods and its own means but in a coordinated manner with the other European states,” French President Nicolas Sarkozy, who called the meeting, told reporters….
Europe “is still a dwarf compared to the U.S.” in terms of willingness to spend, said Laurence Boone, an economist at Barclays Capital in Paris. The statement on supporting banks “is not a progress. It’s the same as before the summit.”
Germany appears to be the stumbling block. Again from Bloomberg:
Hours before the summit, Dominique Strauss-Kahn, managing director of the International Monetary Fund, met Sarkozy to press the need for agreement. “Collective action is even more necessary in Europe than in the U.S. because Europe is more complex than the U.S.,” he told reporters. “Action must be taken quickly and in a concerted manner.”
German Chancellor Angela Merkel’s opposition underscored the hurdles to forging a unified front. “Each country must take its responsibilities at a national level,” she told a joint press conference after the summit.
The group agreed on coordinated policies on deposit guarantees and on having another summit soon to hash out fundamental reform. Bloomberg again:
Sarkozy said that “all actors” must be supervised, including rating firms and hedge funds. Executive-pay systems must also be reviewed, he said.
“We want a new world to come out of this,” Sarkozy said. “We want to set up the basis for a capitalism of entrepreneurs, not speculators.”
Anticipating increased spending, declining tax revenue, and government bank takeovers, they called for “greater flexibility” in the application of European Union competition and budget rules.
The last statement is an admission that the Stabilization Pact, which limits borrowings and fiscal deficits by EU members, is kaput.