The EU and the Financial Crisis by Tommaso Padoa-Schioppa
In the last few weeks the financial turmoil originated in the United States in the spring of 2007 has precipitated the world economy in the worse crisis since the end of World War II. At this moment it is hard to assess whether the current wave of panic has come to an end and what shape the financial system and the global economy will take after its passage. From a European perspective, however, two elements are emerging with great clarity.
First, unlike the world, the EU is inspired by the right principle: the creation and proper functioning of an integrated market must rest on rules which stand above participants, be they private or public. This holds whether the market is national, continental, or global. What we observe is much more a "policy failure" than a "market failure". The policy that has failed was epitomized by the simplistic view that "less is more", that regulation should be minimized and markets should be left alone. The result we see is a dramatic loss of confidence that risks paralyzing not only financial, but also economic activity, and eventually spill over in the political field. Markets in general, and most particularly financial markets, are not naturally stable. They need rules and controls. The risk is now a move from "less' to "too much", a swing from an excess of laissez faire to an excess of public intervention.
Second, since the "right principle" has been applied insufficiently, the EU is in danger. While it is benefitting from the single currency, it is suffering for its lack of the two other instruments of crisis management: prudential supervision and government action. Because of this void, Europe is exposed to a much greater risk than the US: the risk of fragmenting in national pieces the integrated financial system that has emerged in the euro area and even of disintegrating the internal market. If the policy response to a systemic crisis is not itself systemic, the chances for it to be effective and credible are scant. Disconnected national responses are most unlikely to restore the confidence that is so badly needed; they are more likely to increase mistrust and even generate conflicts.
Until Friday 10 October, we have seen signs of this - in such areas as deposit insurance, injection of public money in the capital of banks, restrictions on trading, etc. - which could turn into a major breakdown of the Single market, not of the financial system only. The Eurogroup Summit if Sunday 12 October seems to have stopped the slide and produced a change in direction. The turn, however, needs to be confirmed by the facts, because the choice to decentralize the implementation of the decisions taken implies a risk of inconsistencies and conflicts. As Napoleon said, "l'exécution C'est tout." As in so many past junctures, the crisis hits Europe with a double potential: a risk and an opportunity. Political leadership - or lack thereof - will decide which of the two potential will become reality.