With leaders divided, EU nations fend for themselves

McClatchy NewspapersOctober 7, 2008 

PARIS — One day after being buffeted by record stock market losses, European leaders embraced an incremental approach Tuesday in response to the economic crisis that has overwhelmed global markets.

Analysts across Europe said the agreement could help reassure jittery bank customers, but some warned that it would do little to address the financial turmoil that's evoked fears of a new worldwide depression.

"It's a safety net, but it won't solve any problems in the financial market," said Jean-Christophe Caffet, an economist with France's Natixis Bank.

As Iceland's leader warned that his nation was on the verge of economic collapse and Australia made its biggest interest rate cut in more than 15 years, Europe's finance ministers avoided taking any sweeping steps to address the underlying problems.

At a meeting in Luxembourg, the European leaders agreed instead on a plan to head off a panic run on banks by boosting the minimum guarantee on bank deposits from 20,000 Euros (about $27,000) to 50,000 Euros ($68,000).

In practice, the move will have little impact in larger countries like France, which already guarantees individual bank deposits for 70,000 Euros (about $95,000).

Instead, it was another indication that differences over how to react to the volatile conditions could make it impossible for the 27-member European Union to agree on dramatic steps that may be necessary.

"I think it is perhaps overambitious to expect the European Union to come up with a solution on a Europe-wide basis," said Philip Shaw, chief economist at Investec Bank in London. "This is really unlikely to happen."

Instead, at least in the short term, European leaders are expected to continue pursuing national strategies of the sort that have already created widespread uncertainty and anxiety around the world.

The destabilizing economic crisis is posing the biggest challenge yet for the EU.

"This is the most extreme stress test you can think of," said Waltraud Schelkle, a senior lecturer at London School of Economics' European Institute. "This is the worst possible scenario because we know that we are not prepared for this kind of crisis."

The financial turmoil has exposed divisions across Europe over what to do about the crisis.

Initially, France floated the idea of a broad-based bank bailout, but Germany vehemently opposed it. Faced with opposition to a European-wide plan, finance ministers who met Tuesday agreed on the short-term step to secure bank deposits.

Some leaders are now pushing for individual steps to save faltering banks instead of a broader rescue plan.

"Piecemeal is the only way out," said Schelkle. "I don't think anyone has a big plan."

The steps came on the same day that the Reserve Bank of Australia cut its official interest rate by one percentage point, a larger-than-expected step and the biggest since 1992.

Meanwhile, Iceland's prime minister announced that he was seeking an emergency loan from Russia to keep his nation from economic ruin. The government of Iceland also took control of the country's second-largest bank, Landsbanki. Neither Iceland nor Russia is a member of the EU.

In London, bank stocks tumbled amid reports that the British government is considering a plan to invest billions in faltering financial institutions.

In New York, the Dow Jones Industrial Average plummeted another 508 points on Tuesday despite Federal Reserve Chairman Ben Bernanke strong hints that the Fed would cut interest rates at its next meeting later this month.

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McClatchy Newspapers 2008

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