While the United States and Britain reel from one catastrophe to another in the storm of the sub-prime crisis, the eurozone has seemed remarkably detached, until recently anyway. For the Americans and the Brits the news is totally dominated by stories of collapsing banks, bail-outs, vast lines of credit insurance which turn out to be no insurance at all, and an American administration desperately seeking a safe path for the US economy over the quicksands of collapsing confidence.
I’m not saying that the Land of the Euro is immune from the impact of this crisis – it clearly is not. The turbulence over Fortis Bank, to name but one of the repercussions, deepens the black hole for the missing Belgian government.
But there does seem to be a difference. The US and UK economies are so much more dependent on their financial services sector than most of the countries of the eurozone. What’s more, the great bubble of house prices linked with high mortgage commitments brings this crisis straight to everyone’s front door in Britain and America.
Maybe the continental reaction is also different because the power centres of the eurozone are so widely dispersed. It’s not like London or New York/Washington where the various regulatory institutions are perceived to work closely together. The European Central Bank from its fortress in Frankfurt is responsible for providing liquidity for the banking system across 15 countries; the framework for EU financial services regulation across the EU is crafted and overseen by Brussels; and individual member states have their own particular responsibilities for applying the rules, such as the clamp-down on short selling.
It’s striking to see how different players are reacting to the crisis. In the UK there may be talk of international co-operation, but the British government makes no mention whatever of the European legal framework, although it is evident that most of the legislation governing the solvency of banks and other financial bodies and the activities of financial services firms derives from EU decisions.
As for continental reaction, note the contrast between President Sarkozy and Charlie McCreevy, Commissioner responsible for the financial services sector. The French President is determined to push for more regulation and reserves particular venom for ratings agencies.
The Commissioner, by contrast, is keeping a low profile. He doesn’t like interfering with markets and plays down the need for drastic action on the regulatory front. He has even said that (unregulated) hedge funds and private equity should not be “tarred with the same brush” as the regulated sector.
Nonetheless, McCreevy must be seen to act, and sure enough the Commission is expected to come forward this week with some new proposals tightening up banks’ capital requirements in relation to securitised debt, although according to reports he has been persuaded by the banking sector not to go too far. Rating agencies will also face registration requirements, though short of the controls which the French and Germans would like.
The German finance minister Peter Steinbrück believes that the US will cease to be the global financial superpower following the credit crisis. He blames Washington for its failure to introduce stricter regulation despite European demands and has told journalists that in ten years time “we will see 2008 as a fundamental rupture”.
Apparently the Minister was particularly stung by the actions of a state-owned bank, which earned the soubriquet of Deutschland’s Dümste Banker from Bild Zeitung after it transferred €350m to Lehman Brothers two hours before Lehmans folded. Steinbrück is pushing for much tougher regulatory measures than McCreevy envisages.
After the Enron and WorldCom crises the US introduced Sarbanes-Oxley, a complex set of rules and red tape which many now see as over-reaction. Policy-makers now face another challenge – of preventing the excesses which produced the credit meltdown from ever recurring.
The Commission’s proposals will be a first step for Europe, although getting even such modest measures through Council and Parliament will be tough, given the impending European elections in June 2009. Maybe, though, this will be the opportunity for the EU to take the initiative in establishing a worldwide framework of regulation which does not throw Baby out with the Bathwater.