For almost a week now, the European Union has been struggling to come up with a coordinated reaction to the credit crisis that continues to strangle the continent's financial system. On Tuesday, finance ministers from the 27 member states gathered in Luxembourg for yet another go.
The result was an increase to the bloc-wide minimum guarantee on bank deposits from the current €20,000 to €50,000 ($67,900). Prior to the meeting, France had proposed hiking the minimum protection to €100,000.
In addition to the savings guarantees, the ministers pledged "to support systemic financial institutions" according to a statement released by the German Finance Ministry, though they stopped short of establishing a Europe-wide strategy.
"We agree that public intervention has to be decided at national level in a coordinated framework," the statment read, according to Reuters.
The agreement did not establish the common European Union strategy that many have been calling for. At a meeting of finance ministers from members of the common currency zone on Monday, Germany rejected the idea of a Europe-wide "shield" to protect the EU banking sector out of fear that German tax revenues would be used to bail out foreign banks. Germany is already the EU's biggest net payer, meaning it sends more money to Brussels than it gets back.
Germany: No Money for a Big Pot
"(Chancellor Angela Merkel) and 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," German Finance Minister Peer Steinbrück said in an interview on German radio on Monday.
That, though, could ultimately prove to be short sighted. The patchwork moves made so far to restore confidence in European banking have had little effect, despite a Monday pledge by all EU member states to take "all necessary measures to ensure the stability of the financial system." Germany's stock market, the DAX, plunged 7.1 percent on Monday with Britain's FTSE 100 index falling 7.9 percent. France's CAC-40 was by far the biggest loser, though, dropping 9 percent. The DAX on Tuesday was faring much better, having risen by 1.5 percent by mid-afternoon, largely on the strength of a wave of speculation that drove Volkswagen stock up by 50 percent to €448.17 per share.
A number of analysts say that, even as European nations struggle to address the crisis, the piecemeal approach could be making things worse. "The EU is liable to be exposed as a fair weather construction, lacking the means of swift response and the hold over its citizens' loyalties to survive really adverse conditions," Stephen Lewis, an analyst with Monument Securities, told the AP. Swedish Finance Minister Anders Borg said: "We need to find a common solution as one country's solution may be another country's problem."
The falling stock markets and ongoing paralysis of the credit markets have led to widespread speculation that the European Central Bank may be working on a coordinated interest rate cut with the US Federal Reserve and the Bank of England. ECB head Jean-Claude Trichet left open the possibility of a cut last week. Were the three banks to agree on a simultaneous rate reduction, it would be the first since just after the terror attacks of Sept. 11, 2001.
Iceland Feels the Heat
Last week, Ireland ruffled feathers in Europe by passing legislation to guarantee deposits in the country's banks. Many were irate that Dublin chose to go it alone, but Ireland's move has since been partially emulated by numerous other European countries, including Greece, Denmark, Sweden, Austria and, most significantly, Germany. Spain said on Monday that, if a common EU response were not forthcoming, it too would guarantee savings deposits.
Outside the EU, Iceland was forced on Monday to take drastic steps to prevent a complete collapse of its banking system. Reykjavik pushed through legislation late on Monday that provides the government sweeping powers to step in as it sees fit into the business of the country's tottering banks. The law gives the government the power to force bank mergers, dictate a sell-off of foreign assets and even force banks to declare bankruptcy. The currency was also pegged to the euro overnight after the krona lost 35 percent of its value against the euro on Monday.
"We were faced with the real possibility that the national economy would be sucked into the global banking swell and end in national bankruptcy," said Prime Minister Geir Haarde.
On Tuesday morning, the government used its new powers to take over the country's second largest bank, Landsbanki. Iceland's central bank said on Tuesday that Russia had offered to loan it €4 billion ($5.44 billion) to help out, but Reuters is reporting that Russian Finance Minister Dmitry Pankin has said the decision is not final. Moscow announced on Tuesday it was providing Russian banks with an extra 950 billion roubles ($36.4 billion) in credit after the Russian RTS index plummeted by 19.1 percent on Monday.
In addition to the European-wide savings guarantee, European finance ministers on Tuesday also discussed ways to limit overly high bonuses for executives of poorly managed financial institutions. The closing statement said "existing shareholders should bear the due consequences of the intervention" and said that executives of companies that need bailout assistance should not be provided "undue benefits."
cgh -- with wire reports