So just how dangerous is the credit crisis for the world economy?
The eye-watering sums which the major central banks have transferred into the banking sector in recent weeks suggest that there’s a massive threat out there.
The European Central Bank’s decision to pump €350bn into the market in the week before Christmas at relatively low interest rates was part of a co-ordinated move with the US Federal Reserve, the Bank of England and the Swiss and Canadian central banks to unfreeze inter-bank lending and bring down the rates which banks charge one another.
There was evidently an immediate problem as banks anticipated closing their books on December 31, but also a sense that nobody knows what’s yet to crawl out of the woodwork. ECB President Jean-Claude Trichet spoke of “uncertainties surrounding the financial health and liquidity needs of financial institutions” in his speech to the European Parliament’s Economic and Monetary Affairs Committee on December 19.
Trichet’s speech touched on many aspects of the ECB’s role, but I especially liked this section: “More than ever, in these periods of tensions, lucidity in the diagnosis, rapidity in the decision, and absence of complacency are of the essence. This absence of complacency is particularly necessary as regards financial stability”.
I must say, the ECB has displayed an impressive “absence of complacency” and appears to have handled the credit crisis more effectively than the Brits over the last five months, although the ECB was not faced with a crisis such as the run on Northern Rock Bank. This has sorely tested the relationships between the UK government, the financial regulator and the Bank of England.
At least the Commission was quick to approve the rescue package, giving the British government until March 17 to present a long-term solution for Northern Rock.
While the British Government has been sucked deeply into the Northern Rock imbroglio, eurozone governments have been bystanders as the ECB takes action.
The credit crisis rated just one paragraph in the presidency conclusions to the Brussels summit on December 14, including a reference – as did Trichet’s speech – to the role of credit agencies, which are beginning to look like the fall guys for the politicians.
It was just before the Brussels summit that 26 European leaders gathered in Portugal for the ceremonial signing of the Lisbon Treaty.
The 27th, Gordon Brown, was just a bit late because of a prior engagement in the House of Commons – a fine-tuned gesture to downplay the whole process, keep the Treaty off the political agenda and add a touch of Brownite disdain to the proceedings. Commissioner Peter Mandelson was not amused.
Climate change was a major item on the December summit agenda. The European Union seems to have emerged with some credit from the UN Climate Change conference in Bali. The really tough negotiations will now begin, aiming towards a global agreement by the end of 2009, when a new American administration will be in office.
European negotiators decided to play hardball during the negotiations, threatening to boycott President Bush’s January meeting in Hawaii unless the Americans agreed to some target figures, but this threat evaporated as the roadmap for negotiations was agreed, albeit without the detailed targets that the EU and others wanted.
The pace of change does seem to be accelerating as the climate change message sinks in. The US position continues to shift, helped no doubt by Al Gore’s campaign and the initiatives by individual states like California. Business too is becoming a strong advocate of action – see for instance the message to Bali by the Prince of Wales’ Corporate Leaders Group on Climate Change, representing more than 150 global companies.
Words must be translated into action, and action is bound to cause some pain. I note that the motor industry is resisting the European Commission’s proposals for cutting average CO2 emissions to 120g per km by 2012, with fines for manufacturers who fail to meet the standards.
The motor industry has always pressed for an agreed approach to emission standards, whereby industry’s investment timescales can be reflected in the setting of EU standards, but the manufacturers’ hopes are always dashed, if not in the Commission then on the rocks of the European Parliament. Looks as if it’s all happening again, and one has to ask whether the impressive reduction in European vehicle emissions of the last 20 years would ever have happened under voluntary agreements.
The EU seems to be holding its nerve over Kosovo. None of the member states has yet broken ranks despite the passing of the December 11 deadline, although we can expect a declaration of independence shortly. The Brussels summit in effect recognised that independence was inevitable, saying that the status quo was unsustainable, while seeking to exercise control over events and stressing that the status of Kosovo “constitutes a sui generis case that does not set any precedent”. Softly, softly is the watchword.
Every effort is being made to set the whole crisis in the EU context, with encouragement for Serbia to speed its path to membership, the dispatch of 1,800 peacekeepers to the region and an active role for NATO’s 16,000 troops in maintaining peace. When Slovenia takes over the EU presidency on January 1 the Kosovo crisis and the broader Balkans situation will be top of its agenda.
See Michael’s mid-November posting for background and the lead up to the Kosovo decision deadline.
Michael now observes EU affairs from more of a distance and has been invited by Fleishman-Hillard to contribute an occasional commentary on current developments – in other words to do some blogging.