Editorial

Any illusion that European politicians were better at handling this economic crisis than their American counterparts has proven to be just wishful thinking. EU leaders convened in two different meetings failed to agree on a concerted effort to support European banks that might falter, as was done in the US bailout plan.

Finance Ministers meeting in the Ecofin forum in Luxembourg could not agree on a comprehensive joint rescue plan. Coordinated initiatives are not the same as concerted action. This may have been inevitable in the case of Europe because the powers of the ECB are more limited than those of the Federal Reserve. Moreover, the EU political leaders were unwilling, or unable, to come up with a common political solution.

Markets showed that they were disappointed with this failure of political leadership and equity prices remain very volatile. It seems it is going to be every man for himself as far as taking action to rescue individual European banks that might face problems.

What the politicians failed to achieve was at least partly remedied by the ECB and other central banks when they reduced interest rates by 0.5 per cent to stimulate the world economies. One hopes that this will signal the return of confidence in the markets.

Britain has already taken the lead to rescue a number of major British banks that risk failing because they have lost the confidence of their depositors and of other banks. Partial nationalisation was the best option in the circumstances and the UK government, like the US one before it, did not shrug off its responsibility to ensure that it saved the British economy, rather than the jobs of the bankers. The other EU leaders took initiatives to guarantee depositors' money but left it to every state to sort out the consequences of any bank failing in their country.

The ECB continues to provide the necessary liquidity to enable banks to overcome the crisis of confidence they have and that is manifesting itself in their unwillingness to lend money to each other and to their customers. But this is not enough. EU leaders continue to squabble on what needs to be done in the face of this major crisis.

With the euro now being one of the two most important world currencies, it is important for the EU to come up with mechanisms that will ensure that when political action is needed to address major crisis, like the one we are experiencing at present, such action is concerted to ensure that it inspires confidence in the financial markets.

Banks are today taking major risks with their depositors' money. If things go well, the management of these banks and their shareholders pocket most of the profits. If, as is happening now, the bankers' gambles turn sour, depositors' money is put at risk and governments have no real option but to nationalise these failing banks to save the real economy.

But while saving national economies is now a top priority, politicians will soon realise that privatising profits and nationalising losses will never be popular with taxpayers anywhere in the world. This is why, once this crisis is over, banking regulation will have to undergo fundamental redrafting.

The ability to think outside the political box is today a valuable skill for politicians who have the grave responsibility of salvaging the financial system and with it economies. The political priorities will be sorted out soon after.