Initially many establishment figures in continental Europe thought they could ride the global financial crisis out. This was, they said, a problem generated by “Anglo-Saxon” free market capitalism that had nothing to do with the well-regulated economies of the euro-zone.
There was even a tendency to gloat at the plight of the US and Britain.
But euro-zone leaders are laughing on the other side of their faces now. It turns out that European banks were eager customers for the dodgy housing loans repackaged as obscure financial instruments that drove the credit boom of the mid-2000s.
And so we’re seeing a series of state rescues of European banks. The German government is struggling to save the mortgage lender Hypo Real Estate, which is being dragged down by the debts of its Irish subsidiary, Depfa.
Far from being immune from the crisis, the economy of the euro-zone has been slowing down much more quickly than those of the US. Germany, the world’s biggest exporter, is particularly vulnerable to any contraction of world trade.
Moreover, the European Union (EU) is actually less well-equipped to respond to the crisis than the US. This is for two reasons.
In the first place, the EU is not a federal state but a confederation of nation states, each of which has both the power and the disposition to pursue its own interests. The decisions last week by Ireland and Greece to guarantee all the deposits in their banks are a case in point.
These are actions by two states that have done very well economically out of their membership of the EU, but which now feel particularly exposed to the crisis. But they put pressure on other states that have much more limited guarantees.
Britain, for example, has just lifted its deposit guarantee from £35,000 per saver per bank to £50,000. It’s been estimated that if it adopted an unlimited guarantee and had to fulfil its promise to compensate all depositors, this would cost £9 trillion, which is several times the size of the British economy.
British bankers are now worrying about losing savers to their Irish rivals. The economist Willem Buiter ranted, “The Irish guarantee is the most ‘in-your-face’ beggar-thy-neighbour provocation since medieval armies catapulted bubonic-plague-ridden corpses into the cities they were besieging.”
The crisis, rather than bringing the EU together, is intensifying the competitive rivalries among its members. Little wonder then that, when the leaders of the four biggest European economies met at the weekend, they couldn’t agree on any significant practical steps.
On returning to Berlin the German chancellor, Angela Merkel, promptly broke EU unity by announcing an unlimited guarantee of all personal deposits in her country’s banks.
A second reason why the EU response is weaker than that of the US is because the European institutions that do exist are rigidly anchored in neoliberal economic dogma. The Single European Act of 1985 makes it hard for states to organise the rescues of bankrupt firms.
Under the 1991 Maastricht Treaty, the European Central Bank is removed from any democratic accountability and has to concentrate on keeping inflation low. By contrast, its US counterpart, the Federal Reserve Board has to worry about preventing unemployment from getting too high as well.
Finally, the Growth and Stability Pact of 1996 puts limits on public spending and government borrowing. But, as the economist John Maynard Keynes pointed out during the Great Depression of the 1930s, when the economy is shrinking, the state should increase spending and borrowing in order to maintain demand for goods and services.
Paradoxically then, the US, despite being the home of free market capitalism, is much more flexible in its use of state power to prop up the economy.
These differences may mean the US weathers the crisis better than the EU. It’s too early to sing the swansong of the American Empire.