Europe has found an effective remedy, the question is what its side effects will be

The hard-won unity has so far saved the EU from deepening the crisis, in the worst-case scenario and from financial collapse. The crisis has been managed for now, resolved in a significantly better and less painful way than in the US. Of course, as always, new problems are arising.

Written by: Đuro Njavro, Dean of ZŠEM

Almost every crisis in recent decades typically brings up the same dilemma. Is the European Union merely a well-organized largest and richest market in the world with over 500 million consumers, or is it something more than that? If, for example, in an attempt to dissect this dilemma we consider only the events of this century, we can rightly say that ‘political Europe’ is growing slowly and gradually. Often, this is not fast enough for the necessary action in a world where global problems—political, ecological, and these days also economic-financial—equally demand a global response. The latest financial crisis originating from the US, due to the interconnectedness of the global economy and global communications, spilled over into European stock exchanges and banks. The American plan to rescue the financial system, although large, with its $850 billion of public money, proved insufficient. The global crisis required a global response, whether unified in the American case or coordinated in the case of EU countries.   

In recent years, numerous examples, such as the Iraqi crisis, the attempt to adopt the EU Constitution, relations with the Russian Federation and China, awkwardness regarding the recognition of Kosovo’s independence, uncertainty regarding the Lisbon Treaty… undoubtedly indicate that the EU today is still too often non-operational and divided. This complicates the conduct of a recognizable common policy. The reasons for such a state are numerous, and among the most important, we can highlight the diverse historical legacy, the specificity of each member’s interests, and the varied connections with the rest of the world, especially with the US. Therefore, dealing with the current global financial crisis was a significant test of Europe’s ability to preserve its own and contribute to the stability of global finances. A major test.

It is not surprising that the existing financial crisis in the global capital markets, which is primarily the result of operations in a new, insufficiently regulated area of financial derivatives, combined with the irresponsible creativity of ‘financial engineers’ and the irresponsible behavior and operations of brokers and management within the American financial market and system, caught the European Union unprepared and divided at the outset. The largest and most developed countries were at the forefront of the disagreements. Germany, i.e., Chancellor Angela Merkel, immediately rejected the proposal of French President Nicolas Sarkozy to establish a common European fund with an initial capital of around 300 billion euros to assist the banking system whenever and wherever needed. When it became clear that the official Berlin’s stance was inflexible, French Economy Minister Christine Lagarde stated that the fund was just one of the possible solutions, especially for protecting banks in smaller member states.

However, even that compromise was not acceptable to Germany. So what happens next? Sarkozy denies that it is a French proposal, Minister Lagarde now claims that there was no concrete intention to establish the fund nor a specific amount of initial capital…, while at the same time a claim is released to the public that the proposal is actually Dutch, which the official Hague immediately denied. On the other hand, the chairman of the Eurozone finance ministers’ council and Prime Minister of Luxembourg Jean-Claude Juncker tried to find a ‘middle ground’ and stated that a common fund is not necessary because the European banking system is more stable than the American one, but he advocates for a common strategy against the possible risk of bankruptcy, rather than treating each individual bankruptcy as a whole on its own. What is this about and why such disputes? Simply due to the fact that Merkel feared that such a fund could lead to German taxpayers bearing the costs of rescuing banks in other countries.  
 
While in the early days of October these squabbles and spins between official Berlin and Paris continue, and the financial crisis, with elements of panic, spills over and spreads, news arrives from London that the British government will make £50 billion available for the eight largest banks. Alongside this plan, British Prime Minister Gordon Brown also presents a proposal for the establishment of a European fund with an initial capital of £12 billion to assist small entrepreneurs. Such a fund would, according to Brown, enable small entrepreneurs in the European Union to immediately receive the money they need to continue employing staff and providing necessary services. Official London has positioned itself with such measures and plans as someone who brings solutions and does not exhaust itself endlessly in discussions like ‘what if…’ or ‘this is needed, that is needed, but…’

The response from ‘the mainland’ did not take long to arrive. French President Sarkozy calls for an urgent Eurozone meeting on Sunday, October 12. Before the meeting, Merkel and Sarkozy show unity. The common fund is no longer mentioned. After the meeting, everything exudes harmony. Measures have been agreed upon. Liquidity is made available to governments, capital is made available to banks that want it, but with conditions, trade is initiated with guarantees, and rules on balancing are changed. In other words, the British plan has been accepted, according to which member states can take stakes in banks to prevent their bankruptcy and that states guarantee the loans they give to each other. Accordingly, governments are ready to provide guarantees for refinancing banks until the end of 2009, as stated in the joint declaration. The results of that historic meeting, it can now be said, became known the very next day. Portugal announced that it would provide guarantees to its banking system in the amount of 20 billion euros, France 300, Germany 470…

Therefore, it can be stated that the hard-won unity has so far saved the EU from deepening the crisis, in the worst-case scenario and from financial collapse. The crisis has been managed for now, resolved in a significantly better and less painful way than in the US. The stampede of depositors, which was most feared, to banks and the withdrawal of deposits will certainly not occur. Europe has preserved its stability and crucially helped maintain stability and change the trend in the global financial system. Of course, as always, new problems are arising. Is there a remedy for adverse side effects and what kind?
Does such speed and level of socialization of individual failures of financiers and bankers lay the foundations for even greater irresponsibility in the future? Does this precedent mean that states can be relatively quickly and easily pressured by financial-media pressures to reach into taxpayers’ pockets, justifying it with their own interests?

Is it even possible to have stability in the modern financial system and its institutions when they have become so exposed to psychological and media manipulation? How to talk about stability within the framework of persistent, unrealistic growth expectations? All these and many other questions will seek answers in the coming months. Time and peace for searching for those answers have just been bought. First of all, the question arises whether the model of today’s financial system has completely collapsed or whether what is happening today is just a glitch in the system that can be fixed.  

However, if states so easily opt for nationalization as the only measure for salvation, because that is actually what it is about, then it can be concluded that unregulated markets of ‘imaginative financial derivatives’ connected with the unethical and greedy behavior of ‘financial engineers’ have shaken the foundations of the system of free entrepreneurship. This has encouraged all those who have not had much trust in the market and free entrepreneurship as a system to start criticizing. Therefore, it is not surprising how quickly and easily discussions are already opening about how Putin’s model of governance in the Russian Federation, equally as the Chinese one, is slowly emerging as a possible alternative.

This has, indeed, been seen before a few years ago when states, such as France, mercilessly subsidized various areas affected by the energy crisis. In other words, the state is once again becoming not only a regulator but an extremely ‘important player’, and it is not an exaggeration to say also ‘owner’ of the market. However, all this is far too premature. This crisis of global finance, we believe, does not lead to abandoning the market and free choice in the economy, but rather seeks a new appropriate market regulation. The crisis again brings to the forefront the question of business ethics and responsibility; it testifies to how powerful the market can be socially destructive if there are no values and ethics among market actors.

The time ahead will bring much work for all those who can contribute to a better understanding of why the world entered the global financial crisis, how to prevent its recurrence by building better regulation and oversight, and how to pay the costs of the damage it caused while minimizing its impact on economic slowdown. In this regard, considering Croatian experiences from the 1990s, where we dealt with banking problems, unregulated regulations, shaken values, building markets and free entrepreneurship, and reconstructing the entire financial system, could be interesting and valuable. Even the smallest can teach us something.