Open Letter on the European Response to the Financial Crisis

It is now clear that the financial crisis is severely hitting the real economy. Heads of state/government meeting for the European Council will therefore have to consider taking additional concrete steps to ease the extraordinary tensions in the European financial system and to counter the very sharp economic downturn.

Concerning the financial system, about two months ago a special meeting of the heads of state/government of the eurozone, involving also the UK Prime Minister, showed that in extremis member states can avoid divergent responses to the crisis. Member states agreed to a common approach (essentially recapitalization and guarantees for bank liabilities) with individual member state implementation. EU leaders chose not to organize the rescue effort in a single action conducted through a European institution. Two months later it is becoming apparent that mere coordination has its limitations.

When Europe’s governments were facing the clear and present danger of a wholesale breakdown of the European banking system, common actions were seen as desirable not least because markets expected them. As the sense of immediate danger of a systemic collapse has waned, national actions are again drifting apart. Different countries emphasize different policies and implement them in quite different ways.