The Financial Crisis - Implications for Europe

While the American Congress struggled to pass an Emergency Economic Stabilization Act to find relief for the crisis, European leaders still indulged in "European Schadenfreude". Only at the end of September in the Economist Peer Steinbrück, the German finance minister, described the American free market approach “as simplistic as it was dangerous”. By then European leaders were quite unaware of the difficulties in their own banking sector.

This perspective changed dramatically now and Europeans are short on answers on how to solve the crisis themselves. So far, no common solutions were foreseen and European Union Member States try to solve the impact of the financial crisis individually (see articles below). A common rescue packet similar to the one passed by the American Congress would be difficult to realize in Europe due to the nationally regulated markets.

However, during their summit in Paris last weekend the leaders of the European G8-member states agreed on a flexible application of the European Stability and Growth Pact and flexibility on state-interventions on bail-outs to avoid an upcoming recession. A similar reaction appeared during the world debt crisis in the 1980´s where G5 Members agreed upon the effectiveness of internationally coordinated intervention at their summit in Versailles in 1982.

What do these developments imply? Will there be a shift from an American-type laissez-faire market approach to a stronger state interference? If judging from the national interventions of European states conducting bail-outs for crisis struck financial institutions that currently take place, a major political shift might be expected towards a re-nationalization of market intervention.

Ironically, this marks a contrary movement to what the European Commission has been propagating concerning non-intervention of states in order to prevent a distortion of competition and intra-community trade.

It remains to be seen how the G7-finance ministers and heads of central banks will deal with the challenges that this crisis brought about at their annual summit in Washington on Friday October 10, 2008. In a letter to his colleagues Steinbrück suggests eight steps to stabilize the world financial system. It will be crucial to find common ground between the G7 Members on this issue to commonly coordinate efforts in order to best deal with this financial crisis. It is expected that the issue of commonly finding a solution to stabilize the financial markets will also challenge the leaders of the G8 at a summit later this year.

Further coverage on the topic

31. Oktober 2008 15:32