Read the following article and do the writing exercise at the bottom of the page.
Waiting for the big one
Oct 2nd 2008
From The Economist print edition
A dangerous fault-line runs through European banking
IF A week is a long time in politics, in finance it can be an eternity. In just a few days some of Europe’s leaders changed their attitude from Schadenfreude over America’s banking woes to near-panic as banks teetered in Britain, Ireland, Germany, France, the Benelux and Iceland.
The fear that spread through the wholesale money markets after the bankruptcy of Lehman Brothers, and the crumpling of several of the European banks that relied on them for funding, may have caught some of the region’s politicians by surprise. But by mid-week bank supervisors across Europe (hardly a sanguine lot at the best of times) were heaving a collective sigh of relief. With remarkably little muddle, five banks in seven countries had been bailed out or culled.
Besides supervision, there are conflicting legal (and insolvency) systems, an enduring reluctance of regulators to clip the wings of their national champions, and a recognition that taxpayers would probably balk at being asked to support depositors in another country. Those all seemed to make the chances of co-ordinating action to save European banks remote.
With Fortis, the first of Europe’s big cross-border banks to founder, the impossible was made to look easy. “I’m amazed they’ve pulled it off thus far,” says a former central banker. When confidence in the bank began to seep away, the governments of Belgium, the Netherlands and Luxembourg—the three countries in which it has its main businesses—clubbed together, partially nationalised the bank and shored up its balance sheet with a capital injection of €11.2 billion ($16.2 billion). Two days later Belgium and France (with a bit of help from Luxembourg) injected €6.4 billion into Dexia, another wobbler.
It may, however, be premature to celebrate these narrow escapes. There are potential pressure points right across European finance. National governments have mostly acted unabashedly in their own interests, especially Ireland’s. At the times when governments have acted together, as with Fortis, they have carved banks up into their national chunks and dealt with their own part.
And although Europe has come face to face with systemic risk, it has yet to find a system-wide solution. There are some improvements under way. The European Commission proposed on October 1st tightening the rules governing how much capital banks should hold and improving co-operation between different bank supervisors. Calls for the creation of a single European financial regulator that would watch over the continent’s biggest banks, and a pan-European bail-out fund to rescue them, are also growing louder—a group of prominent academics demanded both in an open letter to Europe’s leaders on the same day. But, so far, countries like France and Germany have been unable to agree on a pan-European rescue fund. A huge redesign of a region’s safety apparatus in the midst of a panic is a lot to ask for. But in this crisis, politicians are learning that to be effective, they have to be bold.
EXERCISE: Write a brief (500 words) commentary on relationships between national governments, the Euro area, and the globalisation of finance. The first paragraph should contain a statement that introduces your argument and indicates the point of view. In the second paragraph, SUMMARISE the above article (no more than 100 words). Then apply what you have learned at university to write your own thoughts on the problem.
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