Britannia Radio

FINANCIAL TIMES 2.3.09
Global policy shortcomings will cost us dear
By Wolfgang Münchau

Virtually every policy response to the crisis, on both sides of the 
Atlantic, seems to be falling short. My colleague, Martin Wolf, and 
the editorial column of the Financial Times have argued that the 
Obama administration's financial sector rescue plan is dangerously 
inadequate. I would like to make the additional observation that the 
tendency to disappoint applies to almost every single policy decision 
by almost every government.

Let us briefly take stock of some of the policy decisions and 
proposals in the European Union. Faced with an economic contraction 
of at least 3 per cent this year, according to my estimate, the EU 
has agreed an effective stimulus of some 0.85 per cent of gross 
domestic product for the current year, as calculated by David Saha 
and Jakob von Weizsäcker, two economists at Bruegel, a Brussels- 
based think-tank. The stimulus was also not well co-ordinated, which 
limits its economic impact.

EU governments reacted to the acute phase of the crisis with mostly 
voluntary state recapitalisation schemes and debt guarantees. But 
there is not a single country where the schemes seem to be solving 
the problem of insufficiently capitalised banks, able and willing to 
lend to businesses and consumers.

Last week's much awaited report about the future of European banking 
regulation and supervision was another example of a policy proposal 
failing to meet even the lowest expectations. The committee, headed 
by Jacques de Larosière, a former governor of the Bank of France and 
managing director of the International Monetary Fund, could not agree 
on the need for a single supervisor for Europe's 45 cross-border 
banks. Instead, it recommended leaving national regulators in charge 
and creating two new institutions - one at the macro level and one at 
the micro level - with the job of mediating between national 
governments and regulators. When asked why he did not opt for an EU-
wide supervisor, Mr de Larosière responded: "We might have been 
accused of being unrealistic." I got the sense - but maybe this is a 
misperception - that he wanted to push harder for more 
centralisation, but that there was no consensus.

Another fitting example of policy complacency is the response to the 
central and east European (CEE) currency crisis. This was on the 
agenda of Sunday's informal European summit, which concluded after 
this column was written. The proposals that were discussed ahead of 
the summit included a stabilisation fund. This is desirable and 
necessary, no doubt, but it is not at all clear how this is 
sufficient to ward off a speculative attack against all peripheral 
CEE currencies. I argued last week that euro-isation is the way to 
go.  [When the eastern countries wanted to accelerate the process of 
joining the euro they were firmly told to get back in line and pass 
all the tests first.  -cs]

Where tragedy turns into farce is the string of policy proposals by 
Angela Merkel, German chancellor. At one time, she advocated a United 
Nations Economic Council as a co-ordinating body for global finance - 
an economic equivalent to the UN Security Council. At the recent 
Group of Four European summit, she pushed ahead with a proposal to 
regulate hedge funds and tax havens. Most recently she said that 
countries should co-ordinate the timing of their bond issues. All 
this would imply that the crisis was caused by hedge funds, by policy 
failures due to a lack of international organisations, and by the 
fact that the Americans and Europeans issue their bonds on the same 
day of the week. I shudder to think what she might propose next.

Why this extraordinary complacency? One reason is that policymakers 
are not sufficiently alarmed about the immediate economic 
catastrophe. To them, this is still what US economists call a "garden-
variety recession". They must have been told that global trade has 
been in freefall for four months now, contracting at a faster rate 
than during the Great Depression. Yet they still appear to believe 
that the economy will miraculously recover in the second or third 
quarter, which is when their stimulus packages will kick in. But 
these plans are nowhere near big or good enough to stop such a 
massive decline so quickly.

As for Ms Merkel and her colleagues from France, Spain and Italy, 
they seem to be overwhelmed by what is clearly the wrong type of 
crisis for them.

That cannot be said of Mr de Larosière. For all my criticisms of his 
committee's recommendations, his analysis of the global financial 
crisis is spot on. His team was afraid to make proposals that, in his 
estimate, had no chance of being adopted. I have no illusions about 
the enthusiasm among governments for a single EU banking supervisor. 
But if nobody puts up a fight, we should not be surprised that the 
only policy actions we get are the ones we get.

This is no longer a banking crisis. It is a policy crisis of the 
first order. Speculators, once more, are getting ready to deconstruct 
a European edifice, as they did in 1992, but this time it will be one 
on a bigger scale