6 October 2008

BRUSSELS -- The European Union has a common market and a common currency, supported by a common monetary policy. However its jumbled response to the global credit crunch shows that it still lacks a common financial policy.

The governments of Belgium, Luxembourg, Germany, Greece, Ireland, Britain and the Netherlands have so far adopted ad-hoc approaches to bank rescues and savings protection.

But as the ramifications of the US-born financial crisis become increasingly alarming, there are growing calls for a major re-think of the way EU member states should protect their economies.

"The current approach of rescuing one institution after another with national funds will lead to a Balkanization of the European banking sector," wrote 10 leading economists in an open letter to European leaders on Friday.

"Unless Europe's leaders immediately unite to address this crisis head-on before it spirals out of control, they may find themselves fighting over how best to salvage the aftermath," they added.

The letter was compiled by Daniel Gros and Stefano Micossi of the Centre for European Policy Studies (CEPS), a Brussels-based think tank. It was addressed to the leaders of the four EU members - Britain, France, Germany and Italy - of the powerful Group of Eight (G8) who met in Paris on Saturday.

Leaders at the G8 summit vowed to support Europe's troubled financial institutions, but this also infuriated other EU leaders who felt excluded.

On Tuesday, all of the bloc's 27 finance ministers will have a chance to debate the crisis together at a meeting in Luxembourg. Every sign is that they will shun the advice of CEPS' economists and opt for evolution, rather than revolution.

Diplomats say ministers will reaffirm their wish to better coordinate their economic and financial policies. But experience suggests that when it comes to the crunch, cultural differences and national egotism all too often risk undermining any calls for unity.

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