The global financial crisis began in the summer of 2007 and had affected the whole world by September of 2008. Many governments needed to receive different types and amounts of economic support to avoid serious damage. With this crisis, the question of how the member states of the European Union can take measures independently is brought to the agenda, as their economies have been connected to each other for fifty years with the attempt to integrate. In this comment, it will be discussed how this question is handled by the European Union and which measures are taken for crisis management.
Firstly, as there is not an institution called ‘government’ which contains all the member states in such a formation as the European Union, the measures which would be taken by the federal government, like in the United States, are taken by different organs of the European Union like the European Commission; the ECOFIN Council, which contains the member-states ministers of Economy and Finance; EUROGROUP, which contains the member states of the euro zone; the European Council and finally the Council of Ministers. Consequently, as there is not one specific organ, many meetings had to be held to discuss this problem. As the global financial crisis became much more prevalent in 2008, three meetings were held (the Global Financial from Summit of G7 members, the meeting of the member states’ Ministers of Finance and finally the meeting of ECOFIN). During these meetings, it was declared an obligation to ensure the stability and the reliability of member states’ banking systems and to prevent the panic of the deposit owners. In the same way, new principles are determined due to the time restrictions for the intervention of the member state in the global financial crisis and the obligation to consider the interests of the taxpayers. However, the idea of creating a fund to support the troubled banks was refused.
It should be considered that the negotiations and the decisions made during these meetings are, in fact, clumsy attempts. However, after this period, on 12 September 2008, an urgent meeting took place between the presidents and the prime ministers of the member states of the eurozone, and they declared that the common action plan must be accepted to find a solution to this global financial crisis, including the eurozone. This plan includes the suggestions of Great Britain’s Prime Minister, who was also invited although Great Britain is not a part of the eurozone. These precautions were also adopted in the Summit of the Presidents and Prime Ministers, on 15 September. We should mention that these precautions correspond with the principles, determined at the G7Summit, on 10 September in Washington.
If we need to resume, the plan, accepted by the Presidents and the Prime Ministers of the member states, occurred because of the changing policy of Germany who, at the beginning, declared that national precautions must have priority. This plan contains 3 elements; first is the loan guarantee between the banks of member states to establish the confidence again. Second is to inject cash into the banking system by the European Central Bank. Finally the third is for the governments to transfer aid to the troubled banks, which also takes the interests of the taxpayers into account. These methods were used to try to prevent bank failures or to strengthen their proper funds so as not to have financial difficulties.
Measures that we can summarize briefly like this are seriously criticized because of their weakness and for being formed as just a general framework for national measures. If we look at the side of the European Central Bank and the European Commission, we observe that the measures, which are not totally passive, were taken in response to the global financial crisis.
In this context, the European Central Bank played its regular role in the final stage as a lender by injecting billions of Euros to compensate for the negative effects of blockage in the market. The Central Bank has adapted the forms of intervention, as well as the debt, by setting a fixed interest rate.
Moreover, it has expanded its portfolio to include a broader range of assets. The Bank President Jean-Claude Trichet has participated in all meetings about the crisis, and in these meetings his calm attitude has not been overlooked. The reason for this is probably being forced to give up the principles that are applied in a very strict manner in the previous period, because of the global crisis of the European Central Bank.
Regarding the Commission, it can be said that it increased the maximum deposit limit from 20.000 Euros to 50.000 Euros, which is given to troubled banks by governments to keep them afloat. Although the president of the Commission attended all of the meetings about this crisis, the member states feel the president had a rather passive attitude towards solving the problem. The main worry seems to be how this plan can be applied with the rules of competition, because, we can tell that applying this plan means kind of suspending the rules of competition. We can see this by looking at TSB’s important bailout of HBO, by the direct government aid to troubled banks like Dexia, and finally by state financial aid to many banks.
These situations, mentioned above, incited the Commission, which is in charge of the application of competition rules, to react. The Commission declared that if the state temporarily intervenes in market prices, the competition would not be distorted. The Commission also determined some regulations about state financial aid towards the banks to protect the competition between the member states’ banks. At this point, state aid can only be given on the condition of helping troubled economies and market players should not be supported over the taxpayers. Moreover, this aid should be restricted only with the national banks. The Commissioner overseeing competition blocked the French plan designed to bail out the French banks, since it was not in line with the abovementioned criteria.
As a result, within the framework of the fight against the global financial crisis, the measures taken by the European Union clearly revealed the strengths and weaknesses of the Union. As regards the Union’s strengths, the integration of financial issues comes to the forefront. The European Central Bank System (ECBS), under the European Central Bank’s leadership, has managed to give an adequate reaction to the liquidity crisis in the banking system that occurred as a result of the global crisis.
In the same format the ECBS may affect economic activity by management of common interest rates. However, against the cyclical changes and shocks it’s possible to give more large-scale reactions. On the other hand, the existence of the common currency floated to the member states the impacts of fluctuations originating from the global crisis and helped to dilute the effects of these fluctuations. In the absence of common money, it is possible to say that some national currency can be more affected from these fluctuations. Finally, owing to the common currency system, the poor functioning of some of the member states’ economies is covered like the Spanish real estate market.
Regarding the Union’s weaknesses, we see that the lack of a capable decision-making political in the Union takes first place. As a result, the measures that are taken seemed to be disconnected from each other. Therefore, unfortunately it brings national-scale measures to the fore. From this regard, the global financial crisis can be converted into an opportunity. Thus, the European Union can be less unprepared towards the possible environmental crisis in the medium term.
Translated by Tugçe Comert
Edited by Kaitlin MacKenzie
