European Nations Exchange Blame Over Crisis Response

PARIS—French President Nicolas Sarkozy received a harsh lesson about European realities when he convened an emergency meeting of leaders representing the Continent's four biggest economies—France, Britain, Germany, and Italy—last week to deal with the financial-markets crisis.

French President Nicolas Sarkozy prior to a meeting with the country's top bankers and insurers.

On the table was a Dutch proposal to establish a Europe-wide bailout plan modeled on the one approved in the United States. "What is of the essence is that Europe should exist and respond with one voice," Sarkozy, who currently holds the rotating European Union presidency, said after the emergency meeting in Paris last Saturday.

The response from Germany and Britain: no way.

Instead, even as stock markets plummeted and governments intervened in a number of failing major financial institutions, European leaders preferred to take a distinctly nationalistic approach. Referring to Germany and Britain, a French official was quoted by the daily Le Monde as saying, "You cannot have coordination when Europe's leading economy and its major financial market are not involved."

Today, the European Central Bank and the Bank of England stepped into the vacuum by joining the U.S. Federal Reserve in cutting interest rates by half a percentage point. Until the coordinated action, which was also joined by the Canadian and Swedish central banks, the Europeans had refused to cut their rates out of concerns about inflation.

The cut brings the European Central Bank's main rate down to 3.75 percent from 4.25 percent, still much higher than the Fed's 1.5 percent benchmark rate.

It is unlikely that the rate cut will lead to a Europe-wide bailout plan similar to the one passed by the U.S. Congress.

"Individual states are very reticent to react jointly because the banking system remains very different from one country to another," Philippe Moreau Defarges, an expert on the European Union at the French Institute of International Relations, said in an interview. "The countries that have a solid banking system don't want to pay for those that don't."

At the time of its introduction in January 2002, backers of the newly created euro argued that it would allow European states to better coordinate economic policy and act as a rampart against economic downturns and volatility in the currency and stock markets. But in creating the European Central Bank to manage the currency, EU members refused to give the institution jurisdiction over the banking system, unlike in the United States. The European Central Bank's priority, at German insistence, is to contain inflation.

The current crisis has manifestly pointed out that despite the establishment of a common currency utilized by 15 EU countries and the progressive integration of its major economies, the European Union, already unable to establish common political and defense policies, also has a long way to go before it can speak with one voice on financial and monetary matters.

As if to prove the point, Ireland began a series of European one-man shows on September 30 with its decision to guarantee the total debt of the country's six major financial institutions and of all individual deposits. Despite complaints about Ireland's going it alone, other countries, including Germany, were forced to follow just days later in an effort to restore sagging confidence. Berlin was also constrained to save Hypo Real Estate, the country's leading mortgage bank, by approving a 50 billion euro credit line to the institution over the weekend.

Nevertheless, German officials remained adamant against a broad European salvage plan despite growing calls from economists to inject more capital into the banking system as a whole instead of coming to its rescue on a case-by-case basis.

"We refuse a European umbrella in which, as Germans, we would have to contribute to a common pot without having control and without knowing what would become of Germany's money," German Finance Minister Peer Steinbruck declared yesterday.

With European stock markets in a deeper freefall than Wall Street's and growing doubts about the solvency of major banks, the only measures the EU finance ministers from 27 member states could agree on at a meeting in Luxembourg Monday were to raise minimum guarantees for bank deposits to $68,000 (50,000 euros) from $27,000 (20,000 euros) and to issue a set of common guidelines to be followed in case of intervention to save a financial institution.

Perhaps reflecting their own inability to come up with a comprehensive rescue package, European leaders have turned their ire on U.S. Secretary of the Treasury Henry Paulson's decision not to rescue Lehman Brothers. "When you allow one domino to fall, the others risk collapsing," French Finance Minister Christine Lagarde said in an interview on the RTL Radio Network.

‘We will not tolerate a European Lehman Brothers," the French minister told her colleagues at yesterday's Luxembourg meeting.

For the moment, therefore, Europeans will continue to deal with the crisis case by case. The problem is that a new crisis appears to arise every day, with no one knowing when or where the troubles will end.

On Sunday, French banking giant BNP-Paribas bought Fortis, Belgium's biggest bank, for $20.5 billion (15 billion euros) to keep it from collapsing. Yesterday, Spain announced that it was setting aside $41 billion in bank funds to help troubled lenders. Then today, the British government said it would inject some $87 billion to prevent the collapse of its banking system, in the process partially nationalizing the sector through the acquisition of preference shares.

Experts believe that the crisis may eventually lead to the creation of Europe-wide banks. This is already happening to an extent, with BNP-Paribas, for example, now Belgium's largest bank after the acquisition of Fortis. Under EU regulations, governments will not be able to oppose such moves, and pan-European banks could pave the way for more centralized control of the banking system.

"What is very sad is that the Europeans did not draw on the advantages of the euro in order to create a financial policy," says Moreau Defarges. "Europe always advances by using only one leg at a time."