Europe shows limits in credit crisis response

By Paul Taylor - Analysis

BRUSSELS (Reuters) - Nicolas Sarkozy's restless activism may have galvanized the European Union into taking the diplomatic lead in the Georgia crisis, but his attempt to assert EU leadership in the financial crisis looks less convincing.

Since the credit crunch swept from the United States into Europe last month, member states have gone their separate ways in rescuing distressed banks, guaranteeing some or all deposits and suspending practices such as short-selling of shares.

The French president, current chairman of the 27-nation EU, brought together leaders of Europe's four biggest economies -- Germany, Britain, France and Italy -- and of key EU institutions to seek a common response at a Paris summit on Saturday.

The result was a pledge to coordinate national efforts to shore up banks, protect savers and regulate markets, but not the grand European rescue fund that officials said France floated last week before retreating in the face of German opposition.

"We jointly commit to ensure the soundness and stability of our banking and financial system and will take all the necessary measures to achieve this objective," the Big Four declared in a statement long on reassuring rhetoric and short on specifics.

A day after the U.S. Congress enacted President George W. Bush's $700 billion bail-out for the financial sector, Europe underlined the limits of its ability to act collectively.

Even in an era of cross-border banks and global financial flows, banking supervision and market regulation remain chiefly a national responsibility, since only governments can commit their taxpayers' money in the last resort.

"No German or Estonian is going to accept Brussels spending his money to rescue a failed Greek bank," a European Commission official said in explaining why the idea of a 300 billion euro ($415.7 billion) EU rescue fund would not fly.

BEGGAR-THY-Neighbor?

The hopes of European integrationists that the credit crisis would soften resistance in London or Berlin to more centralized EU financial governance have been dashed for now.

"What has happened so far is short-term plumbing, no kind of new vision to reform the European structure of financial oversight," said Karel Lannoo, an expert on financial regulation at the Center for European Policy Studies.

"My concern is that I see nobody acting, unlike the way Sarkozy acted in the Georgia crisis," he said, advocating an immediate start on establishing a European system of financial supervisors along the lines of the European Central Bank.

British Prime Minister Gordon Brown remains determined to keep a firmer European regulatory hand off the City of London, Europe's biggest financial center.

And Germany, the biggest contributor to the EU budget, remains determined to avoid its money being used to give what Chancellor Angela Merkel called "a blank check to all banks".

Indeed, some analysts see risks of a re-nationalization of European economic policy in reaction to the crisis, notably in the summit's agreement to ease strict EU budget deficit limits, as France had sought, by invoking "exceptional circumstances".