Time to think ahead

The latest financial crisis is likely to have long-lasting consequences not just for the United States, but also for the European Union. At least one implication of the changes in Europe is getting very little public attention, however, because it would be political suicide to discuss it- even though it should be discussed.

The issue is the extension of sweeping bank guarantees to European banks. In the absence of any pan-European policy and consensus on what to do, each nation has been left to its own devices. The bailouts and acquisitions so far mostly have been limited to Germany, Belgium and the United Kingdom. But many more countries, starting with Ireland, have started guaranteeing all savings deposits in their local banks, in a way that smacks of illegal state aid. The fact that it should be considered state aid is easy to prove–no sooner had the Irish begun guaranteeing deposits than money began flowing from the UK, where savings weren’t guaranteed to the same extent, to Ireland, where the money was considered safe.

In the normal scheme of things, Ireland would have had to tell the European Commission in advance that it wanted to do something of the sort, and the Commission would have had time to consider such a sweeping guarantee and either accept or reject it. In the heat of the current crisis, European Competition Commissioner Neelie Kroes did initially raise questions about the guarantee–then abruptly reconsidered. Not because the Irish maneuver had been deemed kosher after all. But because doing anything to criticize the Irish when the European Union needs Ireland’s approval of the Lisbon (aka “constitutional”) Treaty to usher in a new era of EU reform and evolution would clearly have been political suicide.

So instead of the Commission doing what it should to protect the EU’s common market, the Commission is standing by and watching as not just Ireland, but a host of other countries, now extend sweeping guarantees to all bank deposits in their territories.

In the long run the single market will be saved only if all EU member-states extend the same or similar guarantees to their banks, thereby removing the spectre of the kind of beggar-thy-neighbor competition that the EU has long sought to stamp out. And that may be a good thing if it saves consumers’ deposits and prevents wider banking sector disasters.

The real lesson, however, is that the EU should have anticipated such a crisis long ago, acknowledging the emergence of pan-European banks and investment vehicles by creating a pan-European regulator with the power to supervise banking activity throughout the single market and intervene effectively in a crisis, perhaps with an emergency fund of its own. Instead, it risks further undermining the single market today and failing to prepare for the next crises – which history shows will come sooner than anyone expects.

Wise leaders would see this coming and seek a European solution to an increasingly European problem rather than groping for national solutions that are at best a temporary fix.

Your EUvangelist.

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