What can Europe do when the financial crisis is global?
If it was not obvious before, it surely is now – that finance is global. Money can
move around the world at the press of a button. National governments have little
or no control as the current crisis has hit every part of the world. If it was not
obvious before, it surely is now – that if there is any hope of avoiding future cataclysms
it is necessary to have an international effort to find out what is going on and
international agreements seeking to control systemic excess.
However, the meltdown has occurred so quickly that there has been no time to have
international agreements and each country has had to scramble to try to control its
own situation. How often is a crisis forecast and avoiding action taken: we learn
from our mistakes.
While the limitations of national supervision of the financial markets are well recognised,
the chances of international agreement must be slim. Certainly in the short-term.
The EU has been trying to achieve a true common market in financial products for
fifty years and we are not there yet. There has been no progress at all in instituting
common supervisory standards and so financial companies are encouraged to migrate
to the laxest regime while still retaining their right to free movement of capital
within the Union. The global nature of the current crisis suggests that supervision
standards need to be international but if the EU could in fact agree a regulatory
framework there is a good chance it would be accepted as a blueprint for wider application.
Jacques de Larosiere, a former managing director of the IMF, has come up with a plan
which may prove a breakthrough. With EU leaders agreeing at their recent Berlin
meeting [21.2.09] that something needs to be done, this plan is timely. It sensibly
suggests a start can be made by simply bringing together regulators from around the
Union to coordinate standards. There is no suggestion of a single regulatory body:
that would be rejected by the UK for a start. Indeed, while the money for bailing
out banks is only available from national coffers, individual states have an incentive
to keep a close watch on their own bailiwick.
As the global crisis has unfolded however it has surely become questionable how far
we can expect to avoid future problems through better regulation. We can have a
certain amount of faith that new regulation might at least produce more information
as to what is going on in financial markets. The unexpected nature of the current
crisis has been put down to sheer ignorance amongst even financial journalists as
to the scale and nature of some of the financial instruments peddled around the world.
Yet there will be resistance to any effort to get participants in the market to divulge
what they will see as commercially confidential data.
More fundamentally there is little chance of agreement on where to draw red lines
in our capitalist system. The UK faith in “light touch” regulation has arguably
led to the massive losses in the banks, as freedom to take risks became licence,
and Lord Turner, the new head of the FSA, has promised a “revolution” in regulation
hoping to stop excess. But at then end of the day is anybody in the UK or across
Europe in a position to stop businesses taking risks which turn out to be unfortunate.
Will the Eurozone survive the recession better than the UK? [24.2.09]
It was easy to see why the financial problems started in 2007 in the UK and the USA.
Financial services had come to dominate the UK economy, hand in hand with Wall Street.
They were riding for a fall, based on an inordinate amount of credit, coupled with
a blind faith that it would always be available. Banks started to borrow 20 or 30
times their reserves in order to expand their loan books. Building Societies demutualised
in order to join in the fun. The money generated fed the frenzy. Hedge funds and
private equity companies were formed to channel money into the stock exchange and
mergers and acquisitions. The longer the band played the wilder the dancing became.
People confidently invested with the likes of Madoff and Allen Stanford. Families
borrowed more than they could afford on the principle that house prices would go
on rising. Companies lent more than a house was worth on the same principle.
Surely none of this happened in the Eurozone! Anathema to America, wariness towards
perfidious Albion, resistance to hedge fund “locusts” surely saved the Eurozone from
the logic of anglo-saxon capitalism. Apparently not. The caution generated from
past financial melt-down, the tradition of renting rather than buying a home, the
closeness of the banks to local business – all this surely would save the eurozone
countries from contagion. Apparently not. The recession seems to have arrived across
the continent and indeed across the globe as it has in the UK and the USA. There
was supposed to be decoupling, but apparently not. Why? [to be continued]
A report in the FT says that productivity in Europe dropped last year in comparison
to the US. The reason given is that American companies were more ruthless in sacking
people in the recession than European companies. That says a lot about the two
Viviane Reding, the EU telecoms commissioner, [a lady from Luxembourg], is ruffling
feathers again. Excellent! Her determined pursuit of operators to get a Common
Market for mobile phone users is not making her popular with them. So far she has
achieved reductions in charges for cross-border phone calls [capped at €0.46 per
minute]. Now she is tackling the cross-border email, surfing and text message charges
[proposing a cap of €0.11 for the average text message from next July as against
the current charge of €0.29]. Even if the operators recoup the costs of reducing
these prices in their charges elsewhere, the principle of reducing barriers to trade
across the Common Market is being upheld. The fact that the general public will
notice these initiatives as they go on holiday is a definite plus for EU PR. [24.9.08]