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Posted on 12/13/2008 9:34:48 AM PST by TigerLikesRooster
Shockwaves expose the fragility of finance in Europe
Noriko Hama (Maincihi)
How has an integrated Europe responded to the current financial upheaval? Has it displayed its unity as a community? While various perspectives on these questions have livened up the pages of Europe's financial newspapers and publications, what is the real story? It is my belief that Europe, to put it bluntly, has hardly demonstrated unity and instead has put its lack of teamwork and institutional flaws on display.
The financial turmoil spread in full force from the U.S. to Europe at the end of September. The bankruptcy of Lehman Brothers and the U.S. government's bailout of AIG led to massive losses at major banks in the European Union, which have also run into problems raising money. If these problems had been ignored, all EU countries would have experienced runs on their banks. In the blink of an eye, a tense atmosphere had descended upon the entire European Union.
The government of Ireland was first in mustering a response by guaranteeing deposits at its six domestic banks. This rapid and drastic step was welcomed by the people of Ireland and the Irish financial community.
However, outside of Ireland, things were entirely different. Not unexpectedly, the other members of the European Union heaped scorn on Ireland's response. If Ireland alone were to take measures to guarantee deposits, this would cause major problems for the banks of other countries whose deposits would all begin to flow toward Ireland. Any person with a little practical understanding understands that shifting funds from banks that provide only limited protection to those that fully guarantee deposits is a natural act of self-defense.
However, if everyone does it, then the banks in countries outside of Ireland will suffer outflows of deposits and be left in dire straits. Indeed, this is what happened to Ireland's neighbor, Britain.
This occurred because money can be moved around freely within the EU. In addition to encouraging the trend toward the liberalization and globalization of finance, the EU has at the same time aimed to integrate the European financial market. While this effort is still only half finished in many respects, the EU has established an environment that encourages the free flow of money.
Under such conditions, if one country decides on its own to adopt preferential measures affecting how money is handled, the results are predictable. Money from all over the EU will flood into that country's financial market, so every country must resist the urge to steal a march on the rest. As members of an integrated financial market, selfishness cannot be tolerated. This is the tacit agreement underpinning the effort to integrate the EU's financial market.
In the current crisis, however, every country has conveniently forgotten this unstated agreement. Each member of the EU is trying to steal a march on the others, and each country is looking out for itself.
In order to avoid being victimized by those who try to win an unfair advantage, a country's only choice is to resort to march stealing. Employing such reasoning, Germany, following in Ireland's footsteps, decided to guarantee deposits at its domestic banks. Because Germany is a central entity in an integrated Europe, and its economy is the largest in the EU, it was subjected to even more criticism from EU critics than Ireland was for its decision to act alone.
As the various EU countries grew aware that this state of affairs was untenable, they reached an accord to adhere to common principles for financial rescue in the second week of October, and all EU member countries decided to guarantee deposits up to a maximum of 50,000 euros.
However, their accord also mentioned that some members intended to raise the limit to 100,000 euros. While the accord prevented countries from outright cheating, it left the door open for some partial march stealing, and is thus not a genuine solution. Since the interests of each country are intricately intertwined, the accord was only a half-measure. At the end of the day, it seems that the internal solidarity of an integrated Europe does not amount to much.
Lack of solidarity is not the only problem. The current situation has brought a major institutional flaw into relief -- namely, the fact that the European Central Bank (ECB), the central bank for the euro bloc, does not have financial supervisory authority. The authority to supervise and regulate financial institutions in the EU, the euro bloc, and Europe as a whole, has been retained by respective countries.
Since a unified system of control has not been established, countries that attempt to steal a march on their fellow members are not kept in line. Although the EU has unified its currency and markets, it has not unified the authority to supervise financial institutions. The EU framework clearly contains contradictions.
Of course, it is not as if the Europeans are unaware of these contradictions. They are fully aware of them. But eliminating these contradictions would be a major undertaking, and force members to choose between concentrating authority in the ECB or dissolving the euro bloc. And the uproar that would ensue is not something the EU relishes. That is why this issue has put on the shelf as another ambiguous tacit agreement. Ambiguity is one of the keys to preserving harmony. However, when financial and economic turmoil of the sort that we are confronted with today erupts, the fragility that underlies the ambiguity suddenly comes to the surface. These days, integrated Europe has been confronted with plenty of reasons for self-reflection. (By professor Noriko Hama, Doshisha University)
Ping!
Europe’s countries may not have access the $3.5 trillion that japan does thru its Pension fund, et al. Sarkozi is setting up a $20Billion Sovereign Wealth Fund (SWF). Japan’s SWF is likely to be $250 Billion when they get around to it! oughta scare the pants off the Shorts!
This is exactly what happened in the 1930's. Recent rounds of international financial meetings were intended to prevent this from happening now. Looks like they failed. A bad sign.
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