A group of leading economists today called on EU leaders to mount a coordinated Europe-wide rescue operation for the continent's banks to prevent a "once-in-a-lifetime" crisis spiralling out of control. The 10 economists, including Willem Buiter, a professor at the London School of Economics and a former Bank of England rate-setter, warn that Europe faces a repeat of the 1930s, with the savings of hundreds of millions threatened unless governments act together. Their "call to action", published by the DIW institute in Berlin, comes as France summons British, German and Italian leaders to an emergency summit in Paris this weekend to draw up a common response to the financial crisis. The French finance minister Christine Lagarde last night rebutted reports that president Nicolas Sarkozy, the current EU president, would present a €300bn (£236m) bail-out plan similar to the US rescue scheme, dubbed a "Euro-TARP" or troubled asset relief programme. The 10 economists stop short of demanding a similar scheme, saying the key problem in Europe is high leverage among international banks rather than lack of liquidity. "Hence the EU contribution must be centred on a recapitalisation of the banking sector, through the injection of public equity or through mandatory debt-to-equity conversions," they said. They added: "This has to be done at the EU level (eg through the European Investment Bank). The current approach of rescuing one institution after another with national funds will lead to a Balkanisation of the European banking sector." In a dire warning to policymakers, they wrote: "Trust among financial institutions is disappearing and there are risks that fear will spread more widely. Turmoil in financial markets must be stopped before it causes major damage to the real economy. If the turmoil produces credit market paralysis, jobs and businesses will be destroyed on a massive scale. "A further weakening of the real economy would put more loans at risk and create a vicious cycle of falling asset prices, deteriorating ability to repay loans and diminishing credit flows." The signatories are: Alberto Alesina (Harvard), Richard Baldwin (Geneva), Tito Boeri (Bocconi, Milan), Willem Buiter, Francesco Giavazzi (Bocconi), Daniel Gros (CEPS, Brussels), Stefano Micossi (Rome), Guido Tabellini (Bocconi), Charles Wyplosz (Geneva) and Klaus Zimmermann (DIW, Berlin).Economists call for EU-wide banking rescue operation
Thursday, 2 October 2008
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