European leaders, having denounced the U.S. regulatory lapses that led to the Wall Street crisis, are attempting this weekend to cope with the spillover to their own countries.
In the past week, Peer Steinbrueck, the German finance minister, said the U.S. approach to finance “was as simplistic as it was dangerous.” French President Nicolas Sarkozy said it was a “mad idea” to think that markets are always right, and Italy's finance minister, Giulio Tremonti, who has written a best-selling book about the dangers of globalization, claimed that he had been vindicated.
Despite the smugness, European stock markets have taken a battering and banks have collapsed, because of the complex connections between markets and financial institutions around the world. No one has completely escaped the carnage. The governments of Britain, France, Germany, Ireland, Belgium, the Netherlands and Iceland have all had to bail out troubled banks within the past week.
On the heels of congressional approval of a $700 billion bailout package, Sarkozy convened key European leaders in Paris on Saturday in hopes of forging a common response to the turmoil. Officials from four countries — France, Britain, Germany and Italy — gathered in the gilded splendor of Elysee palace in Paris, along with officials from the European Central Bank and European Union for several hours of talks.
But even words of warning from the head of the International Monetary Fund, Dominique Strauss-Kahn, who said Europe is facing “trial by fire,” were not enough to spur agreement on many well-orchestrated actions.
Trying to put the best face on their talks, the leaders announced plans to seek relaxation of EU rules on the amount of money individual states can borrow, plans for unspecified action against the executives of banks that fail, and a need for rescued banks to be “sanctioned.”
But the impression that actions will be loosely coordinated at best was underscored by Angela Merkel, the German chancellor, who said “each country must take its responsibilities at the national level.”
When Sarkozy unveiled his plans for the summit earlier in the week, he had grander visions for a coordinated European response to the financial turmoil.
But by late in the week, relations between national leaders had descended into squabbling, exposing the political reality that every government was scrambling to contain the crisis within its own borders.
Tensions between Sarkozy and Merkel increased after the German government blasted a proposal (initially thought to have come from France) to create a $414 billion European fund to bail out banks.
At least one French newspaper reported that relations between Paris and Berlin were in crisis.
Further tensions flared because Sarkozy invited so few European leaders to the Paris summit.
“If the big countries and representatives of EU institutions meet today and hold discussions, it's not a good way of working,” Finland's finance minister, Jyrki Katainen, said Saturday in a television interview. “We're all in the same boat.”
Indeed, some analysts argue that small countries like Iceland potentially could be at greater risk than big countries because the assets of their banks – some of which are heavily exposed to markets – are multiple times greater than the size of their national economies.
Finance ministers from 15 countries in the Euro currency zone are scheduled to meet Monday, and ministers from all 27 EU member states will meet Tuesday.