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Why the EU Needs to Unite to Fight Credit Crunch

So far every EU nation has reacted in its own way to the international financial crisis. Christian Ehler, a member of the European parliament, talks to Deutsche Welle about what the EU nations can do about it.

European Union flag covered in euro coins.

EU member states refused a French proposed EU-wide rescue fund

Deutsche Welle: Some EU countries have created unlimited guarantees for savings accounts. How much sense do these unilateral actions make?

Christian Ehler: I think that it certainly makes sense, in the current crisis, to regain the trust of customers by undertaking these sorts of national guarantees for bank accounts. In the long term, of course, it isn't a solution, because you have to keep in mind that small countries, like Iceland, would be completely overwhelmed if their banking sectors were to hand out such guarantees.

One potential consequence has been discussed. Namely that customers would transfer their money to other countries which have wide reaching guarantees, To what extent might that result in unfair competition on the housing market?

I believe that the current situation makes it even more important that we regain people's trust. Out of all the parties involved, consumers are reacting the more reasonably. Nevertheless, it has to be said that consumers want to know that their money is safe in these sorts of situations. So far it has been really important to send this signal. In the long run that isn't a solution because it could perpetuate unfair competition. I think that for now it's just a temporary solution and it's a step in the right direction

Won't the EU countries have to work together if they want a widespread rescue packet like the one in the US?

They can't, plain and simple. There are two reasons for this. The one is money market policy. There we have the European Central Bank. That's the biggest hero of the international finance crisis. It was different in America, where on the one side there was the markets with liquidity, which had to ensure that the on the other side interests wouldn't sink too low, which brought put us in danger of inflation. That's what we do in money market policy because there we have a contractual basis. When it comes to financial policy, every EU country has its own sovereignty. They each have responsibility over their national own banking supervision. Because of that they have to take on risks nationally. That can change when some member countries are no longer able to do that. But just look at the reactions on Sunday to the quick decisions, which were necessary in the case of Hypo Real Estate. The idea that 27 member countries could all agree and the idea that it would come with a high risk that some countries would be forced to come up with billions of euros to bail out a bank in Greece or the Netherlands doesn't seem to me to be really feasible at the moment.

After the mini summit over the weekend the French president, Nicolas Sarkozy, announced that the EU Stability and Growth Pact will be softened. So countries can still contract more debts. Is that a good sign?

I not only believe that it isn't a good sign, but that it's wrong, plain and simple. The instuments that we have there, namely the Stability and Growth Pact, have proven themselves reliable. And it is clearly defined in the Stability Pact how much national debt a nation must have and still be able to respond in a flexible way to special situations – and the collapse of large European banks is a special situation. But that has nothing to do with the fact that we cannot and will not tolerate the relatively lax French deal with their finance policies in the Stability Pact. Keep this in mind: the things that are necessary for a state to intervene in order to stabilize the financial market is made possible by the Stability and Growth Pact. Everything else is just decoration and doesn't make much sense.

Christain Ehler is an economist and member of the European parliament and sits on the finance committee.

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