As One Stand Together
After an initial flurry of shadenfreude, it seems to have dawned on Europeans over the past week that they are, if anything, in an worse situation than the United States is. In part, this is because it seems that their banking and financial sector is, contrary to stereotype, actually less regulated than ours. And in part this is because Europe has constructed an economy that’s pretty highly integrated but doesn’t have a central EU institution with the capacity to deal with a problem of this scope. The European Central Bank lacks the authority, and there’s no European Central Finance Ministry to turn to. Now, though, Finance Ministers are meeting in Luxembourg to try to find a common approach.
On the other hand, just because Europe needs a common approach to the problem doesn’t mean they’ll actually get one. The EU decision-making procedures are pretty dysfunctional so things could go badly wrong. But it’d be hard for a bunch of different countries to maintain a currency union in the midst of a banking crisis if the countries are taking wildly different approaches and having dramatically different levels of success. Thus, the crisis would seem likely to either prove to be the impetus for further integration or else the impetus for disintegration of the existing supranational bloc.
28 Responses to “As One Stand Together”
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October 7th, 2008 at 8:34 am
That’s “Schadenfreude.” Lovely word, but let’s get it right.
October 7th, 2008 at 8:43 am
I was chatting at lunch the other day with a German friend, before the banking crisis hit Europe, about the poor state of the USA’s credibility, whether it be military, environmental or financial.
“Of course”, I said “You realize that if they elect John McCain, things will get much, much worse”.
He looked at me and said that wonderful word:
“Schadenfreude!”
Its a two-way street.
October 7th, 2008 at 8:46 am
German pedant: you must be new to this blog.
Speaking as an EU citizen I think this post is spot on, though I suspect that the worst lending practices seem to have been implemented in the US. Where the health of the financial systems are concerned this is neither here nor there as the debt was packaged and spread throughout the system. But the real-estate shocks may be more severe in the US.
October 7th, 2008 at 8:53 am
After an initial flurry of shadenfreude, it seems to have dawned on Europeans over the past week that they are, if anything, in an worse situation than the United States is.
No, not even close. While the financial crisis is global and could (catastrophically) affect all countries, the economic effect is bound to be worse in the US. When all is said and done, the value of American houses will be 30-40% lower than they were one year ago – and households will be about that much poorer. Consumption will be depressed for years to come.
In a few European countries there was also a housing bubble, but nothing comparable to the US.
October 7th, 2008 at 8:57 am
I was surprised by how many EU states don’t have the euro as their official currency.
Nothing like getting kicked in the wallet to test a friendship.
October 7th, 2008 at 9:06 am
In what sense are European banks less regulated than US banks? In terms of deposit taking? Lending? Financial market operations? Capital requirements? Ownership (or not) of certain types of assets, such as stock in publicly traded companies? Foreign ownership?
These are all areas where banking regulations exist, but they are so diverse that it is difficult to attach meaning to a comparison of the overall level of regulation between two different financial systems.
October 7th, 2008 at 9:08 am
Or, most likely, it could have no effect on the union at all. People seem to forget that, although a lot of observers tread it that way, it isn’t a nation state, and that it doesn’t work like one.
Please explain how a financial crises would harm the union? it’s been trough a few already without too much problems.
Just saying it might isn’t enough. you’ve got to have actual reasons to back that statement up. Otherwise your comment is just meaningless fluff.
October 7th, 2008 at 9:09 am
I think Matt is wrong on this one.
The banking regulation is national, leaving the various European countries with varying size of problems and various means to combat the problems.
The ECB will control the money supply and interest rates as always, with the remaining national banks largely following suit.
IF some countries cannot lift the burden of the crisis, we will have to see if other EU countries, individually or through EU institutions, will step up.
Until then, there’s no reason to believe that most of the individual countries cannot solve their own problems.
More centralized EU regulation on banking will most likely SUCK HARD! Let’s avoid it, shall we?
/Limagolf
October 7th, 2008 at 9:53 am
6 and 8 are right. Trying to say anything about “Europe” in terms of regulation is difficult, given the leeway among member states to formulate their own financial policies (as opposed to monetary policy, which the ECB manages).
In my mind, European government functions somewhat like the Articles of Confederation might have if they had been allowed to survive.
I’d have to say though, that I disagree with #8 that each state can get itself out. I just don’t see how several disparate approaches could be as effective as one unified approach. Unfortunately, I’m operating in a vacuum of realism here, because there is a .001% chance that European nations could ever all agree to one set of financial policies. Even creating the ECB was a huge political struggle between the French and German monetary traditions.
I think it would be better if they did work together, but as long as we’re wishing, why not wish the whole crisis away?
October 7th, 2008 at 11:09 am
unity
October 7th, 2008 at 1:14 pm
stop this… war!
October 7th, 2008 at 1:28 pm
the crisis would seem likely to either prove to be the impetus for further integration or else the impetus for disintegration of the existing supranational bloc.
One important factor will be the effect on public opinion. If the EU comes out of the crisis looking less neo-liberal, then greater integration is possible. Remember Barroso’s term as President of the European Commission is up soon, and he’s seen as a major force behind the unpopular neo-liberal trend. So that’s one thing to watch.
October 7th, 2008 at 1:37 pm
I am not sure if European approach to regulation is dis-functional. In general, Europeans defer to “experts” to a larger degree than Americans, and committees that meet in Brussels or Luxemburg can sometimes impose bolder solutions that what can pass through American Congress.
As far as the price bubble in real estate is concerned, Spain is as bad as California, perhaps worse. A country of similar population to California has at least 2 millions of unsold appartment that were built on speculation, there are even complete brand-new suburbs that are ghosttown. England is probably as bad as USA. Somehow, on both sides of the Atlantic real estate speculation goes out of hand periodically, including rather improbable places (like, why market in Faroe Islands should go bonkers? Great retirement location if you love storms and whale killing, but was it the reason?)
October 7th, 2008 at 2:07 pm
In part, this is because it seems that their banking and financial sector is, contrary to stereotype, actually less regulated than ours.
False.
I’ll post my link disputing this myth when you post your link supporting it.
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