The European Union’s week from hell

Oct 9th 2008 | BRUSSELS
From The Economist print edition

IT COULD have been funny if it were not so serious. The excuses came thick and fast all week, as European Union leaders, for all their customary talk of collective action, were forced by the world credit meltdown into a hotch-potch of individual national schemes to guarantee deposits and prop up banks (see article).

The most amusing excuse for Europe’s disarray came from François Fillon, the prime minister of France. He told the French parliament that it was “logical” for national governments to take the lead in saving their own banks. After all, a collapse might threaten at 2am, and no minister would want to “wake up” his 26 EU counterparts to debate a rescue with them. Mr Fillon had a point, sort of: national authorities know their own financial sector better than outsiders, and speed is indeed often of the essence. But he was also covering up a bigger reason for Europe’s slow start in this crisis. The meltdown—and the speed of reaction required—cruelly exposed the institutional and political limits of the European project.

France knows this better than most. It holds the rotating presidency of the EU, a job France’s president, Nicolas Sarkozy, used to advantage during the Russian invasion of Georgia. But an emergency financial summit France convened in Paris on October 4th between leaders of the four largest economies in the union—France, Germany, Britain and Italy—was a flop.

Even before the leaders gathered, Germany let it be known that it rejected a French suggestion of a joint European rescue fund, worth perhaps €300 billion ($420 billion). The details are hazy, because French officials later denied that the plan was theirs. Less than 24 hours after the Paris summit ended in a flurry of platitudes, Germany struck again, this time announcing a state-backed guarantee for personal savings deposits in German banks (a political pledge worth more than €1 trillion, the finance ministry estimates).

Ireland had been the first to break EU ranks, offering to guarantee deposits at Irish-owned banks, amid fears of bank collapses. By the time EU finance ministers met in Luxembourg on October 7th, half a dozen countries had promised new or beefed-up deposit guarantees. In a bid to impose a semblance of co-ordination on the chaos, the assembled ministers were invited to hike the EU-wide minimum level for deposit insurance, to €100,000. Some countries, mostly new members from the ex-communist block, said they could not afford such a move. In a fudge, the EU ministers agreed that at the very least they would guarantee deposits of up to €50,000. Ministers added a promise that Europe would shore up “systemically relevant” institutions (though what counts as too big, or too interconnected, to fail was left carefully unsaid).

One explanation for this nation-by-nation approach is institutional. The EU’s founding fathers thought monetary union would go hand in hand with economic union, and the convergence of fiscal and monetary policies. Many assumed that political union would follow before too long. But history took a different turn, and the EU has ended up a strange hybrid: its members have pooled big chunks of sovereignty, and 15 of them share a currency. But it is not a federal state. The European Central Bank controls monetary policy for the euro zone but banking supervision remains under national control.

However, the main explanation for the week’s disappointments had less to do with institutional architecture than with political will. Nothing in the EU’s architecture prevents national governments from pouring money into a central EU rescue fund, as briefly suggested by France (and more recently Italy), if that is what they want to do. The truth is that they don’t.

The Germans have been the most honest in saying why. “We as Germans do not want to pay into a big pot where we do not have control and do not know where German money might be used,” the finance minister, Peer Steinbrück, told German radio. Actually, German voters have a hunch where their taxpayers’ money would be used: in countries such as Britain (home to the City and profit-mad Anglo-Saxon capitalists) or Spain (scene of a housing bubble driven by cheap credit, of a sort to make thrifty German savers shudder).

The crisis is not over, however. It took American politicians a while to explain to voters on Main Street just how they would suffer if the high-fiving swells on Wall Street were allowed to go under. European politicians may yet find themselves in a similar bind: having to explain to the sturdy burghers of Hamburg why it is in their interests to bail out braying City boys in London, or Latvians who overused their credit cards. That’s quite a sell.