Economic Crisis: Europe's Response

Europe in recent weeks has witnessed the type of anti-U.S. gloating usually seen during the soccer World Cup, the quadrennial event in which the American team is routed in the early rounds. This year, the spectacle of highly paid American bankers falling on their faces is inspiring lectures from afar. The reckless pursuit of profits, a disdain for regulation, manic risk-taking—all characteristics of self-satisfied U.S.-style capitalism—has led to widespread embarrassment. The tsk-tsk-ing reached a new level with a recent cover story in the German newsweekly Der Spiegel: "The banking crisis is upending American dominance of the financial markets and world politics." The piece notes the delicious irony of the United States' having to nationalize parts of its financial system. "The Americans are now paying the price for their pride," it notes. "Gone are the days when the U.S. could go into debt with abandon." Gone, too, are the days of "turbo-capitalism" imposing its mores of "avarice and greed" on the global economy. No wonder schadenfreude—that lovely word meaning joy at other people's suffering—was coined in German.

But now the clog is on the other foot. In early October, the banking crisis mimicked Madonna—it went all Euro on us, and with a vengeance. Germany has been forced to bail out the nation's second-largest property lender. Iceland, whose financial system now swims with the fishes, has seized several banks. Britain unveiled an expensive plan to inject up to $88 billion of capital into proud financial institutions like Barclays. Several European countries have hastened to boost deposit insurance.

Some of the wooziness can be blamed on a virus that originated in the United States. But (I got your irony right here, Klaus) just as the American-ness of America's economic system led to our current woes, the European-ness of the continent's political and business culture is partly to blame for its current pickle. In fact, in many respects, Europe's banks have fared no better than their American cousins.

Der Spiegel noted with disapproval that "the total value of all outstanding mortgage loans in the United States—$11 trillion (€7.6 trillion)—is almost as large as the country's gross domestic product." Surely, the good burghers of Brussels and shopkeepers of England wouldn't be so foolish with debt, would they? But in Europe, "they embraced financial capitalism and leverage more than we did," says David Smick, founder of The International Economy magazine and author of "The World Is Curved." The assets of tiny Iceland's big banks were about 10 times the island nation's gross domestic product. Martin Wolf, the magisterial Financial Times commentator, noted that the combined assets of Britain's Big Five banks are four times the Sceptered Isle's GDP. The assets of JPMorgan Chase, the largest U.S. bank, add up to about 7 percent of America's annual output.

Europe today is somewhat schizophrenic. Its economy is at once cosmopolitan and integrated—goods, services, capital and people flow freely within the European Common Market—and stubbornly parochial and nationalistic. While the European Central Bank controls monetary policy for the entire euro zone, member countries regulate their own banks. Most Europeans use the euro, but the euros sitting in banks are insured by more than two dozen different deposit insurance regimes. The continent's banks have behaved like Ferraris—souped-up hot rods zipping from the autobahn to the autostrada—while the continent's regulatory system is like a Yugo.

Europeans cling to "national champion" companies that receive special treatment. Ireland extended protection to Irish banks but not to the many foreign banks doing business in the country. "The key problem is, and remains, that every bank has a nationality," said Daniel Gros (no relation), director of the Center for European Policy Studies in Brussels. The result: "There is zero willingness to engage in a concerted effort."

By design, the European Union and the political regimes of its constituent members were set up to be more deliberate and consensus-driven than the United States—the better to avoid repeats of the 1930s. But in a time of crisis, this diffusion of power is a problem. One may call into question the capabilities of American's financial leaders—Treasury Secretary Henry Paulson, Federal Reserve chairman Ben Bernanke, et al. But at least we know who they are. Europe has no official or unofficial economic leader. There is no European Treasury Department that can organize a common response. Jean-Claude Trichet, head of the European Central Bank, can't tap into a massive balance sheet the way his American counterpart can. The result has been crisis management by committee. Italian Prime Minister Silvio Berlusconi wants a joint European fund to rescue European banks. To which German Chancellor Angela Merkel says: Nein!

Europe's travails may provoke a few smirks on this side of the Atlantic, and we're entitled to it. Russian magnates, who last month were buying up trophy assets, are facing margin calls. The dollar is up more than 15 percent against the pound and euro since the summer. But we shouldn't indulge in too much schadenfreude. Being around other sick people doesn't mean you'll get better any sooner. As the title of Der Spiegel's essay warned, recent events should indeed signal "the end of arrogance" of financial systems—on both sides of the Atlantic.