Europe's leadership role in the current financial crisis has been to arrange a record number of summits. President Sarkozy of France persuaded President George W. Bush to host a G20 summit in Washington and Prime Minister Gordon Brown proudly hosted the next one in London. European summits were plentiful, and as empty as expected.
What emerged from those initiatives is a troubling suspicion that Europe's actions will not live up to the rhetoric surrounding all these summits.
At the onset of the crisis, European leaders seemed to relish the opportunity to point fingers. It was all the fault of the Americans and their dysfunctional banks. For German Chancellor Angela Merkel, hedge funds, which she characterized as "locusts," shared the blame. President Sarkozy vilified the tax havens and managed to include them in the G20 communiqués. In the end, the OECD announced last month that there are no more countries on the black list. Of course, they denounced Anglo-Saxon capitalism and Wall Street's compensation system as well.
Is this hypocritical? After all, European bank losses were as high as those in the U.S. They even used the same compensation system. More importantly, their fragmented and ineffective regulatory system shares responsibility for the crisis. Europe needs to address its own weaknesses, and put its own house in order, rather than merely point fingers.
Having followed closely the European reactions, I would venture that they suffer not so much from hypocrisy as from impotence to resolve problems within the European Union. By holding summits and issuing abrasive declarations, European leaders sought to convince their citizens that they had European solutions to the problem, even though they did not. This was particularly true during the very active French presidency in the second half of 2008.
The European Union does not have strong financial regulatory institutions. They never wanted the equivalent of an SEC: I remember participating in the debates of the European task force for European financial services and writing a comment letter stating that "Ten great police precincts would never make Scotland Yard". European politicians are hypocritical when they bemoan Europe's inability to take common initiatives. They did everything to prevent Europe from having the institutional framework to act decisively.
The European Central Bank, which acted admirably during the crisis, has no regulatory power. Everything is decided by the Member States. Europe has 27 SECs, 27 Central Banks and 27 Ministries of Finance. Their coordination is very complex because some are not members of the Euro and are therefore not participants in the European Central Bank system. To add to the complexity, France and Germany are using these reforms to undercut the city of London, thereby creating a conflict with the United Kingdom.
Furthermore, if a decision is taken today by the European Commission , it might be approved by the Council of Ministers in a few months, sent to the European Parliament who may deliberate for more than a year, and, last but not least, submitted to the 27 individual parliaments. Today's decision could be implemented in 2011 at the earliest.
The European system simply cannot accommodate rapid measures such as the TARPs, or the stimulus package, or other urgent regulatory reform. Rather than admitting this difficulty and acknowledging that the best way forward is to cooperate with the United States, Europe will wake up after its long vacation to find the United States already implementing new regulations on compensation, rating agencies, short sales, credit cards, etc. They will likely criticize the U.S. for acting unilaterally, but will eventually follow suit.
The best example of this dynamic is the stress tests. Despite doubts in the U.S. about aspects of the methodology, everybody recognizes that the tests reduced anxiety by providing some degree of transparency regarding the health of leading U.S. banks. The Europeans chose to criticize the initiative and refused to follow course. Realizing their mistake, the European Commission recently launched a system of stress tests at national levels that will be "substantially" the same but whose results will not be disclosed. These opaque tests will not relieve pervasive doubts about European banks.
Despite their protests to the contrary, European leaders have a fundamental problem with transparency, whether at political or business level. The United States cannot wait for the Europeans to arrive at a consensus that might never be achieved, and needs to continue to reform their financial system. The Europeans will eventually, begrudgingly, follow.
The U.S. financial authorities are well aware of their predicament. How do you handle a proud, sometimes loud, but impotent critic? The proper response is to remain focused on the problem while avoiding the temptation to retaliate. So far, the U.S. has been impressively silent about the fundamental weakness of its European partners. Their weakness might, in fact, suit American policies. "Divide et imperas" (Divide and rule) is an old Roman dictum. The Europeans could make it easier for the U.S. by dividing themselves.