Clegg: Europe has to work together to end this turmoil

October 3, 2008 4:25 PM
Originally published by UK Liberal Democrats

Writing in the Financial Times, Nick Clegg calls for a Europe-wide response to the financial crisis that is both systemic and consistent.

Traumatised by the devastation of the second world war, the founders of the European Community were guided by a simple insight: economic integration and stability are the cornerstones of peace and prosperity. Economic meltdown and nationalism in the 1930s created the seedbed for extremism and war in the 1940s. So, as EU leaders meet at an emergency summit this weekend, Europe's history provides them with a stark lesson: collective action is vital in the face of an economic crisis that recognises no borders.

As national governments scramble to come up with their own solutions for the turmoil in their financial markets, the risk of beggar-thy-neighbour policies is becoming apparent. When the Irish government announced this week that it would extend a 100 per cent guarantee for all deposits in Irish banks, savers promptly moved their money from other European banks to Irish ones. Such dissonance in the policy responses between interdependent European economies is a recipe for uncertainty. This is the last thing we need when markets and consumers are suffering a crisis of confidence.

So this weekend's summit must draw a line under the ad hoc reactions of national governments and start spelling out a response that is systemic and consistent between one country and the next.

First, a broadly similar approach to depositor protection must be adopted. We have the perverse situation where levels of protection vary not only between countries but, in the UK, between banks too. Those with savings in Barclays can expect protection up to £35,000 (€44,000, $62,000) while those with Northern Rock or Bradford & Bingley are fully protected. Such discrepancies are unsustainable. The level to which deposits should be protected is an issue of much debate. But one thing is certain: in an open European market the playing field must be level.

Second, the EU must urgently decide where it stands on the application of existing state aid and competition rules. Individual states have already unilaterally waived competition rules because of the exceptional gravity of the crisis, such as in the UK with Lloyds TSB's takeover of HBOS. It is now time for Europe as a whole to decide whether in the short term the public interest is best served by the continuation of competition and state aid rules or whether a more flexible approach for a temporary period of time is justified to facilitate private sector solutions for failing banks and to boost depositor confidence.

Third, we must forge a common approach to credit rating agencies that failed so spectacularly to identify the huge and accumulating risks in the banks they were rating. While they must not be made into scapegoats for the failings of lenders, they must be subject to higher levels of scrutiny and transparency. Compelling them to publish in full who is paying their fees would be a good start in eliminating any suspicion that they may have been operating under conflicts of interest.

Fourth, the EU must play a pivotal role in redesigning the architecture of the international financial system. The Bretton Woods institutions, designed to deal with the challenges of the 20th century, have been impotent when faced with a 21st century crisis. Banks are global entities and, as the credit crunch has shown, their actions in one or two regions have a ripple effect across the world. In this corporate world without borders we must now consider the case for an international watchdog with real powers to identify and prevent systemic risk.

Finally, European leaders must demonstrate that they can learn from each other to sketch out a systemic approach to the future of financial services. The Swedish response to its own banking crisis in the 1990s and the more stringent approach of Spanish regulators to the use of new financial instruments are two examples that may provide a guide to policy responses. While the immediate task is to restore liquidity to lenders and confidence to depositors, wider public faith in European capitalism requires leadership beyond existing ad hoc reactions from national governments.

We are in the eye of a storm, the enormity of which we still cannot fully grasp. It is difficult for policymakers to work with others when they are barely able to keep track of what is going on in their own backyard. But the corrosive effect of fear and panic will only lift once we start working with each other and planning for the future. That is the challenge - and opportunity - for Europe's leaders.

The writer is leader of the Liberal Democrats

Original Financial Times article.