EUROPEAN DIARY:The EU action plan to address the financial crisis was a case of second-time lucky, writes Jamie Smyth
IT WAS A case of second-time lucky for EU leaders at the weekend. In the beautiful Salle des Fêtes in the Élysée palace in Paris, French president Nicolas Sarkozy announced an EU action plan to address the financial crisis.
The measures include radical steps, such as the recapitalisation of banks, state guarantees for new inter-bank lending and an ECB commitment to pump liquidity into a banking system too afraid to lend money.
The tuck box was created on a pan-EU basis - British prime minister Gordon Brown attended the euro zone summit as author of many of the measures - but it will be applied by national governments, according to national circumstances.
Even so, the "minute to midnight" deal may inject some confidence into financial markets. It may also go some way towards restoring EU credibility after a week of bickering, missteps and false promises.
It all began in the Salle des Fêtes a week ago on Saturday at a hastily arranged summit of the big four EU states - France, Germany, Britain and Italy - to agree a co-ordinated EU response to the unfolding crisis.
Even before the summit began, states that had not received invitations were complaining about being left out.
When Sarkozy announced a new "doctrine", whereby each state would operate with its "own methods and means, but in a co-ordinated manner", no one in Europe took him seriously.
Despite criticising Ireland for its unilateral move in guaranteeing its own banks, within 24 hours German chancellor Angela Merkel had announced a similar unilateral action.
A day after that, British prime minister Gordon Brown announced his own radical national rescue plan to rescue a British banking system hovering on the verge of collapse.
The seeds of disunity had been sown in the days preceding the Paris summit when Merkel and Brown shot down a French proposal to create a pan- European bailout fund modelled along similar lines to the $700 billion Paulson plan in the US.
"I reject a European shield, because we as Germans do not want to pay into a big pot where we do not have control and do not know where German money might be used," said German finance minister Peer Steinbrück.
Given that banks are struggling to work out their exposures to toxic assets traded on the international market, there is a clear lack of trust when it comes to pan-European bailouts.
Why should German taxpayers bail out Irish or British banks, which may have engaged in speculative "Anglo-Saxon" business practices for a decade, asked Steinbrück.
By mid-week, a myriad of national rescue measures had been announced in Europe, provoking European Commission president José Manuel Barroso to warn that the "succession of national responses may cause the renationalisation of the European financial system, which would be a setback for European integration".
With EU leaders unable to find the necessary political will to back a pan-European scheme and financial markets still reeling, the blame game began.
Steinbrück blamed the US for the crisis, Sarkozy attacked immoral bankers, while Socialist deputies in the European Parliament focused their ire on internal markets commissioner Charlie McCreevy, whom they described as an "arsonist" put in charge of putting out a fire.
McCreevy's free market ideology has long been a target for the Socialist grouping, while his failure to propose EU-wide regulations for the hedge fund industry has infuriated European power brokers. His laissez-faire attitude to life in Brussels, often preferring to spend Fridays in Ireland (where ironically there have been calls for him to return to Cabinet to help tackle the crisis) or attending Cheltenham rather than commission meetings, has been criticised.
As internal markets commissioner, he holds the responsibility of creating the framework of regulation that governs the single EU financial market. A keen advocate of opening markets, McCreevy has clearly not put in place the necessary safeguards to police them during his four years at the commission. Yet blaming him for the current crisis is a bit unfair, given that EU states refuse to hand Brussels competence over the financial sector.
One example of this was provided last Tuesday when, despite the crisis, EU finance ministers refused to back a shake- up of the regulatory framework for the insurance sector.
The solvency II law would have loosened national controls over the sector in favour of a more pan-EU approach.
"They [ ministers] all want to be able to intervene in the financial services sector and resist devolving power to the EU," said one EU official, who noted similar concerns could also hinder new proposals by McCreevy to regulate banking.
ECB president Jean-Claude Trichet highlighted Europe's difficulty in forging a united response to the crisis last week when he noted that the EU was not a federal state like the US.
Different national circumstances make it tricky to coalesce around a single plan - even the one signed off on Sunday night. Ireland, for example, may struggle to pump cash into its banking sector due to its budget deficit. However with 15 countries sharing a common currency and banks operating across EU borders, the current crisis will intensify calls for more EU integration in the financial sector.
The reaction of EU states to Sunday night's euro zone action plan will provide a clue to whether this is possible.