EU takes lead in economic crisis -- Signals U.S. decline

October 20, 2008

The UK and EU took the lead in finding a resolution to the global credit crisis by pledging $2.3 trillion to either purchase stock in European banks or guarantee their deposits. This both added capital to allow banks to resume lending, and restores faith in banks' solvency, keeping depositors' funds in the banks as well.

In response to this leadership, the U.S. reversed its position on using all of the $700 billion bailout funds to purchase distressed debt. U.S. Treasury Secretary Henry Paulson had said that equity ownership in banks without buying the distressed debt, would repeat Japan's mistakes and cause decades of stagnation.

Leadership in resolving the crisis came first from Great Britain's Prime Minister Gordon Brown, then French President Nicolas Sarkozy, who is serving his six-month term as President of the EU. Sarkozy invited Brown to a planned EU summit after the failure of the previous week's G-7 meeting in Washington produced any definitive solution. Brown arrived at the EU summit with a seven page plan, which included suggestions for a cross-border college of national bank supervisors and a role for the IMF to become an early warning system economic crisis.

Sarkozy and EU Commission President Manuel Barroso met with U.S. President George Bush to discusss formulating a new "Bretton Woods"  - the meeting which formed the IMF, World Bank and effectviely ended the gold standard. They called for more global financial regulation, and an inclusion of China, India and Brazil in G-8 membership.(Source: The Economist, Seeking an end to the madness, October 16, 2008; Bloomberg, Europe Aims for Global Bank Rules Meets U.S. Objection, October 15, 2008)

In response, Bush called for a U.S. led summit in November, after the election, in a move to restore the U.S. leadership position in the world's economic affairs.

What EU leadership means:

Many have said that the EU would splinter during any crisis. Instead, it has emerged in a strong leadership position. The U.S., on the other hand, could not establish enough political leadership to support a bailout package until $100 billion in additional "pork" was added and the Dow dropped 700 points.

In addition, leadership in the U.S. during the economic crisis has come from Federal Reserve Chairman Ben Bernanke and Treasury Secretary Paulson, not elected political leaders. Furthermore, both of the Presidential candidates took a week to develop their responses, which only showed a lack of understanding of the crisis.

Action steps:
When the time is right to buy stocks again, consider increasing your allocation of Euro funds, and decreasing U.S. allocations.

Read more articles on the European economy in European Union and Economic Evolution, a WorldMoneyWatch Top Ten Trend.

Like this article? Sign up for your free email newsletter.