Europe Is Slow to Face Up to the Financial Crisis

LONDON—Europe, which has largely embraced a common currency and a well-integrated common market, now finds itself embroiled in a common financial crisis.

The trouble is, it has yet to develop a unified response to the global financial meltdown that's pummeling many of its largest banks and pushing its stock markets to depths not seen in many years.

Europe's political leaders have not taken the kind of decisive action needed to rebuild confidence in the shaky banking sector.

Instead, there's been an ad hoc, country-by-country approach to quelling the turmoil caused by the worldwide credit crunch, and that's not broad enough to stop worried investors from heading for the exits and anxious depositors from losing sleep. "They're feeding the panic by not taking steps they'll be forced to do anyway," Andrew Walker, a political economist at the London School of Economics, says of European politicians.

Richard Dale, an emeritus professor of international banking at the University of Southampton, says that the world's banking system is "on a knife's edge." He warns that events could lead to a global bank shutdown "if they [political leaders] keep staying behind the curve."

A problem for Europe's policymakers is that there is no central regulatory body to coordinate economic policy. That was by design when the Maastricht treaty set up the European monetary union in 1992 because member countries feared being held liable for their neighbors' debts.

But it has left the European Union unable to effectively deal with a crisis that's hitting large banks, many of which have operations in several countries. European Union leaders have so far eschewed suggestions of setting up a huge, multibillion-dollar central fund to bail out failing banks.

Dale, who authored a 1993 study that warned that deregulation could lead to a banking meltdown, says Europe's crisis management is so "uncoordinated" that it is causing a collapse in confidence.

On Tuesday, the share prices of the United Kingdom's largest banks tumbled sharply on news that they were seeking billions of dollars in government funding to shore up their tattered balance sheets. In response, the government is poised to unveil a plan that would reportedly allow it to offer the banks capital and lines of credit to ensure they don't run out of cash.

Meanwhile, in Iceland on Tuesday, the government nationalized the country's second-largest bank, Landsbanki, hours after its parliament gave the government sweeping powers to intervene in the financial industry. In tones the BBC called "apocalyptic," Prime Minister Geir Haarde ominously warned in a Monday-night speech that his country faced bankruptcy if its banks collapsed.

Those moves come just days after Germany structured a $69 billion bailout of its Hypo Real Estate Holding, a huge mortgage lender. Also, Belgium engineered a $19.6 billion buyout of Fortis bank (a maneuver that also included the Netherlands nationalizing the ABN Amro bank, which had been part of Fortis), and the British government essentially nationalized the Bradford & Bingley mortgage bank.

Although European stock exchanges on Tuesday were generally settled, though mixed, that relative calm followed a day of heavy bloodletting on Monday when markets across the region crashed as investors, despairing of a lack of concerted action in Europe, took flight.

Financial bailouts are repugnant to Europe's politicians, says Vanessa Rossi, an economist at the Royal Institute of International Affairs. "They see bailouts as a threat to fiscal stability."

But without them, credit markets are likely to remain sclerotic, and that'll probably push many economies into the red. Already, France and Ireland are officially in recession, and on Tuesday, the British Chambers of Commerce said it believed the United Kingdom is as well.

The International Monetary Fund is warning that the global economy faces a severe downturn as the credit crisis moves beyond the banking industry to Main Street.

With a vacuum of central leadership, European countries are left to their own devices. Last week, Ireland was castigated by other EU members when it announced it would guarantee 100 percent of all bank deposits; other countries feared their residents would pull funds out of domestic banks and rush to make deposits in government-guaranteed Irish ones.

But since then, Germany, Austria, Greece, Sweden, Denmark, and Iceland have made similar pledges to depositors. On Tuesday, EU finance ministers meeting in an emergency session in Luxembourg agreed that banks throughout the European Union should guarantee customer deposits up to $68,250, an increase of $34,500.

That's the kind of go-slow reaction some economists say only proves how far behind events policymakers are and further unsettles stressed-out markets.

Ultimately, many economists believe that all European countries—either in lock step or individually—will soon offer 100 percent guarantees. That would be a good thing, Dale argues, though he warns that guarantees may have to cover wholesale, as well as retail, deposits to truly ease the credit logjam.

Many banks will end up "semi-nationalized," he admits, "but that's happening anyway through the back door."

The notion, Walker says, is that putting enough guarantees in place "stops the panic," and interbank lending will resume, followed by renewed lending to businesses and consumers.

But, Dale warns, for it to work, policymakers have to stop dithering. "They need to stop talking about it. They need to just do it."