U.S. fiscal crisis effects felt globally
As the spreading financial crisis began to freeze credit markets in the United States, many European leaders regarded the deteriorating state of the American banking system with an attitude of Schadenfreude, a German word that means satisfaction taken at the misfortune of another. They believed the fact that the crisis had originated on the other side of the Atlantic only served as proof that European financial systems were superior to those in practice within the United States.
This past week, however, those who thought they were mere observers of a disaster on a foreign shore became thoroughly panicked participants as five banks in seven European countries were subject to bailout plans over a span of three days. Bad European loans were at the root of many of the problems faced by these banks and others in the region.
Fortis, one of the five banks that were recently bailed out, dug itself into a proverbial economic hole partly by borrowing money to acquire the Dutch bank ABN Amro. However, Hypo Real Estate, the German bank that was bailed out along with Fortis and the three others, got into its distressed situation by backing American municipal bonds that it sold to its investors, proving that the economic conditions in the United States certainly played a role in the collapse of the banks.
Iceland's economy stands out as one of the world's hardest-hit in the crisis thus far. On Monday, Iceland stopped all financial stock trading when its banking sector nearly collapsed. On Tuesday, the Icelandic government, which also recently nationalized the country's second largest bank, revealed a plan to negotiate an emergency $5 billion loan from Russia, a nation that also currently finds itself in dire economic straits. The government of Iceland has made clear that it is now taking measures to prevent complete national bankruptcy.
As the financial situation in Europe has deteriorated, individual countries have resorted to self-preservation tactics as opposed to trying to implement sweeping economic reforms across the continent.
Last week, Ireland made the decision to guarantee the deposits and liabilities of its six largest banks, a move which garnered intense criticism from neighboring countries like Britain and Germany, who worried their own banks would subsequently lose capital to the ones in Ireland.
Willem Buiter, a professor at the London School of Economics, is quoted in last weekend's issue of The Financial Times as saying, "the Irish guarantee is the most ‘in your face' beggar-thy-neighbour provocation since medieval armies catapulted bubonic plague-ridden corpses into the cities they were besieging."
Now, however, Britain has increased its deposit insurance ceilings, while Germany, Austria, Greece and Sweden have also promised to place guarantees on deposits. These actions in themselves are evidence of one of the greatest problems Europe must confront in regards to the potential financial crisis: lack of coordination.
"We've seen both at the national level, and more importantly at the international level, that there's no strategy," Richard Portes of the Center for Economic Policy Research in London is quoted as saying in The New York Times.
Because the integration of Europe's economies is far greater than that of its governing structures, many European governments, especially that of Ireland, have blatantly acted in their own interests instead of working to find a shared solution for the continent as a whole. Countries like Britain and Germany fear such a solution because it could potentially mean that they will have to bail out neighboring states.
However, there have been signs that a more collective effort may soon be underway. On Oct. 1, the European Commission called for, amongst other things, greater cooperation between the supervisors of different banks. Also, many in Europe are demanding a Europe-wide bailout fund, in addition to the formation a single financial regulating body that would oversee the largest European banks. Others, such as Peer Steinbrück, Germany's Minister of Finance, believe that, as the crisis originated in the United States and not Europe, such measures are not overwhelmingly necessary.
Today, the finance ministers and central bankers of the Group of 7, an international organization that includes the governments of Italy, Germany, France, Canada, Russia, the United Kingdom and the United States, will meet at the Treasury Department to discuss what courses of action to pursue in the face of mounting financial contagion.
As is the case with other current economic crises around the world, the one involving Europe has, as of now, no clear outcome. There is no doubt, however, of the severity of the European situation and others like it.
"It looks pretty ugly down the road," Simon Johnson, an economist at the Massachusetts Institute of Technology, is quoted as saying in The New York Times. "Everybody is going to get caught up in this."