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.
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”.
“The contrast between the (plan) approved by Congress and the simultaneous collapse and quasi-nationalization of three financial institutions in Europe is striking,” Deutsche Bank’s Global Markets Research team wrote in a note last week.
“It further highlights our long-standing conviction that Europe is not immune to the de-leveraging process, and that in many ways it is behind the curve both at the institutional level and in terms of the policy response.”
The G4, as the mini-summit was dubbed, did call for EU legislation on bank deposit insurance and credit rating agencies and for the immediate establishment of cross-border colleges of supervisors to watch over multinational financial groups.
In both cases, the aim is to prevent beggar-thy-neighbor policies by governments and banks from spreading.
Some emergency measures, such as the Belgian, Dutch and Luxembourg governments’ attempt to rescue troubled financial group Fortis, have featured cross-border cooperation in tandem with the European Central Bank and the European Commission.
But others, such as Ireland’s decision to guarantee all bank deposits in Irish-owned banks, were taken unilaterally, angering Britain and dismaying the Commission, responsible for upholding a level playing field in the single European market.
Despite the G4 pledge, the lesson of the last two weeks may well be that national measures, even when taken against European opposition, prove more durable and effective than cross-border collaboration.
It would take Brussels at least two years to force Dublin to retract the deposit guarantee law, requiring legal action against the Irish just as the EU is trying to persuade them to reverse their vote rejecting the Lisbon EU reform treaty.
In contrast, the Fortis rescue held less than a week before the Netherlands broke ranks and nationalized most of the group’s Dutch units, sparking recrimination among the Benelux partners at the heart of the EU.
editing by Richard Williams