Financial crisis puts EU unity under test

Special Report:Global Financial Crisis

Special

Report:Yearender

2008

by Shang Jun

BRUSSELS, Dec. 22 (Chinese media) -- The European Union

(EU)'s much-vaunted unity now is under a real test as a contagious financial

crisis unseen since the Great Depression has devastated the whole continent this

year.

Although efforts have been made to seek a coordinated

EU response to the financial crisis, split are emerging between member states as

they put their own national interests first.

The logo of financial group Fortis NV is

seen at the entrance the company's headquarters in Brussels Dec. 14, 2008.

(Chinese media/Reuters Photo)
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EUROPEAN BAILOUT FUND REJECTED

Triggered by the collapse of the U.S. banking giant

Lehman Brothers, the financial turmoil escalated into a full-fledged crisis in

September.

As its financial system has been so interwoven with

that of the United States, the EU soon fell prey to the crisis, with its

financial institutions either exposed to huge losses in the U.S. financial

market or suffering severe shortage of liquidity.

Britain's mortgage lender Bradford Bingley,

Dutch-Belgian banking group Fortis and French-Belgian bank Dexia became the

first European victims of the financial crisis, forcing EU governments to infuse

billions of euros to keep them afloat.

The initial actions were taken by individual or

several countries on an ad hoc basis. But cracks appeared in the EU's unity when

Ireland unilaterally guaranteed all deposits in its own banks to calm nervous

savers, a move siphoning safety-seeking money away from other EU banks.

The fragmented approach created the impression of

disorder and sent confused signals to financial markets, arousing concerns it

may further undermine confidence.

While the U.S. government unveiled a

700-billion-U.S.-dollar package to bail out troubled banks, a similar plan had

been floated for a joint EU fund.

But it was firmly rejected by Germany, which was reluctant to commit taxpayers' money to an EU-managed fund.

COORDINATED ACTION LAUNCHED

Despite the rejection of a European bailout fund,

calls for coordinated action strengthened as the financial crisis deepened in

the EU.

"We are asking and urging member states for closer

cooperation. It is critically important for confidence in the markets," European

Commission President Jose Manuel Barroso said in early October. "It is not just

a problem of injecting liquidity. We also need to inject credibility in the

European response."

In an urgent bid to restore financial stability,

leaders from the 15 euro zone countries hammered out a joint action plan for a

coordinated response at their first ever summit in Paris on Oct. 12.

The action plan, which saw European governments buy

in banks to boost their finances and temporarily guarantee bank refinancing to

ease the credit crunch, was then endorsed by all EU leaders at a broader summit

three days later.

As Barroso put it, the joint action plan served as a

"toolbox," in which EU member states could choose their own national measures.

Based on the plan, EU governments finally mounted a

unified attack against the financial crisis, pledging more than 2 trillion euros

(2.78 trillion dollars) so far on their national bailout packages.

SPLIT ON ECONOMIC STIMULUS

However, the delayed coordination failed to prevent

the worsening financial crisis from further spreading to the real economy.

Hard hit by the crisis, the euro zone economy plunged

into its first-ever recession in the third quarter of this year and the EU is

set to follow suit in the last quarter.

Faced with an economic crisis, EU countries again

embarked on their own way to stimulate their economies.

In a bid to coordinate national efforts to cushion

the slowdown, the European Commission proposed in November an EU-wide economic

stimulus package worth 200 billion euros (278 billion dollars).

The sum amounts to 1.5 percent of the EU's gross

domestic product (GDP), with 1.2 percent coming from EU governments and the rest

from EU funding.

Although EU leaders adopted the plan at their summit

on Dec. 12,divergence on details remained.

Germany, the largest economy within the EU, has

opposed a call for it to expand its national fiscal stimulus plan for the

benefits of the EU economy as a whole, saying their current plan worth 32

billion euros (44 billion dollars) is enough.

On specific measures, EU leaders also failed to agree

on a proposal pushed by the Commission to cut value-added tax (VAT) on green

goods and labor-intensive services such as restaurants, putting off the debate

until a meeting of EU finance ministers in the spring.

Dubbing the summit as the most important one since he

assumed the top EU post, European Commission President Barroso declared the EU

had succeeded in its "credibility test" by adopting the stimulus package.

But there is still a big question mark hanging on the

solidness of the EU's unity, as daunting tasks still lie ahead of EU countries

for them to tackle the spreading financial crisis, analysts warned.