European Leaders Split on Rescue Strategy

By Edward Cody and Kevin Sullivan
Washington Post Foreign Service
Friday, October 3, 2008

PARIS, Oct. 2 -- European governments struggled Thursday to find a joint strategy to contain a growing banking crisis before it collapses additional shaky institutions and inflicts further damage on credit-starved European economies.

The leading economic powers in the 27-nation European Union were split over whether to devise a Europe-wide approach -- a bailout fund was mentioned -- or let each nation tend to its own endangered banks. Their differences threatened to undermine an emergency summit scheduled for Saturday in Paris among the leaders of France, Germany, Italy and Britain to reassure European investors and guarantee that the financial system here stays solid.

The French president, Nicolas Sarkozy, called the summit in an attempt to get ahead of the crisis, which last week seemed confined to the United States but suddenly has loomed as a major European problem as well. The meeting was seen as a test of his leadership during France's six-month turn as head of the European Union. In addition, Sarkozy envisioned the summit as a platform to promote his proposal to gather leaders of the major industrial powers, including President Bush, before the end of the year to launch a rewrite of rules governing financial exchanges around the world.

The European Union is based on the principle that member countries seek common approaches to economic issues and that no government gives its companies and banks special advantages over competitors based elsewhere in the single market. But at times of crisis, issues of national sovereignty and the cries of home constituencies often come to the fore.

Emerging splits were on vivid display after a visit to Germany by the French finance minister, Christine Lagarde. After her talks with Chancellor Angela Merkel late Wednesday, the Reuters news agency reported that the two women discussed forming a $420 billion European bailout fund as a way to build confidence and guarantee against further bank collapses. The fund would be raised by contributions from E.U. governments proportionate to the size of their economies, the agency said.

Hardly had the news spread than the German finance minister, Peer Steinbrueck, said that Germany opposed the idea. Lagarde's spokesmen in Paris said she had not proposed such a plan, and suggested that it was just an idea, put forward by Dutch Prime Minister Jan Peter Balkenende during an earlier conversation with Sarkozy. By Thursday afternoon, Balkenende had called on Sarkozy again, telling reporters afterward that the whole thing was a misunderstanding.

"We are not convinced that an umbrella fund to cover everything would be a good solution," said Jeanette Schwamberger, a spokeswoman for the German Finance Ministry. "We believe that each case has to be decided upon and solved in an individual way. Sometimes it might be a case of liquidity, sometimes of solvency. So far, the answers in each case have been different from every other case."

Bert Van Roosebeke, an analyst at the Center for European Politics in Freiburg, Germany, said a fund would be a hard sell to voters. "German politicians would have a hard time explaining to their taxpayers why their money is bailing out a Spanish bank, for example, and vice versa," he said. "The concept of European solidarity is clearly not that far-reaching to cover such a plan."

But French officials, in conversations with Paris reporters, made it clear that Sarkozy favored some kind of European approach. Lagarde, while disowning specifics of the $420 billion plan, also was emphatic that go-it-alone was not the right solution and that Europe should come up with a common strategy at Saturday's summit.

"What would happen if a little European Union state confronted a bank collapse?" she asked in an interview with Handelsblatt, the German financial daily. "Maybe the government would not have the means to save the institution in question. So the question arises of a solution at the European level."

Belgium, the Netherlands, Luxembourg and the European Central Bank were also pushing for common European measures, reports in Paris said, while Germany and Britain were said to be cool to the idea. The Italian position was unclear.

Christopher Allsopp, a senior economics research fellow at Oxford University and former member of the Bank of England's Monetary Policy Committee, said any European rescue fund would be unlikely to include Britain, which continues to use its own currency, the pound. "It would be more of a eurozone thing," he said, referring to the 15 countries that use the common currency, the euro.

"There is a lot of grandstanding," he added. "The French put something forward, and then not. It doesn't look well worked out to me."

A spokesman for British Prime Minister Gordon Brown said in London that Brown had received assurances from the French government that a Europe-wide bailout fund would not be on the agenda Saturday. Brown has not supported the idea of a general bailout even within Britain, moving instead to nationalize troubled institutions on a case-by-case basis.

The European Central Bank in Frankfurt, Germany, announced, meanwhile, that it was keeping interest rates in the eurozone unchanged. The bank president, Jean-Claude Trichet, said bank governors discussed a rate reduction given the scarcity of credit caused by the banking crisis, but decided against it for now. That signal of a possible cut later was followed by a further erosion in the euro's value against the dollar.

The crisis has caused "an exceptionally high level of uncertainty" in financial markets, Trichet said.

Europe's main stock markets sank again Thursday, although less abruptly than early on in the crisis. London's FTSE index was down 1.8 percent, the CAC 40 in Paris was down 2.25 percent and Frankfurt's DAX dipped 2.51 percent.

Ireland's unilateral decision to shore up its banks with a blanket deposit guarantee also created controversy in Europe, on grounds that it would give Irish banks an unfair leg up over rivals based in other parts of the E.U.

Alistair Darling, the British chancellor of the exchequer, or finance minister, made two telephone calls to Irish Finance Minister Brian Lenihan on Wednesday to complain that the move created a problem for Britain, the Guardian newspaper reported.

Digby Jones, Brown's minister for trade and investment, said Britain would not consider such a guarantee of all bank deposits. "It is easy if you have got 3 million population and a smallish economy -- it is a far easier decision to do that than if you are America, for instance, or Britain or Germany," he told BBC Radio. "If you ever guarantee anything, you have got to assume one day you are going to get it called. . . . It would be trillions and trillions of taxpayers' pounds involved."

Britain is planning to take a smaller step, increasing the amount of bank deposits guaranteed by the government. Currently, deposits of up to 35,000 pounds -- about $62,000 -- are backed, but that is set to rise to about $88,000 next week.

The British Bankers' Association complained that the Irish move could cause British depositors to switch to Irish banks. "While we support proposals aimed at reintroducing stability to the financial markets, we need fair play for financial institutions across Europe," the association said in a statement.

The Irish Parliament, after an all-night session, passed the plan into law Thursday, guaranteeing all deposits in six major Irish banks. The plan, which could theoretically cost about $580 billion, covers all commercial and personal deposits, along with bonds, for the next two years.

Newspaper headlines in Britain warned of a "stampede" of British depositors switching to Irish banks. But bank offices in London seemed relatively calm. Allied Irish Bank officials declined to make formal comment, but a bank official who spoke on the condition of anonymity said Allied Irish had seen "some inflows" at its 90 British branches.

One customer, Simon Rabbani, 64, a retired property dealer, said he had come in to switch his life savings from Citibank to Allied Irish. "They said there is a 100 percent guarantee, that's the main reason why I'm here," Rabbani said. "It's not for the coffee."

Sullivan reported from London. Correspondent Craig Whitlock and researcher Shannon Smiley in Berlin contributed to this report.