Tuesday, October 14, 2008


Following up the previous post, I offer the following hypotheses to explain why a divided, decentralized Europe achieved a coordinated policy response more quickly and easily than the centralized United States.

1. To borrow a page from Alexander Gerschenkron (Economic Backwardness in Historical Perspective), there are sometimes distinct advantages to being late. Europe, which at first thought it might be largely spared in the current maelstrom, had the opportunity to observe U.S. (and British) mistakes in dealing with it.

2. Europe had the advantage of a convergence point modeled on the actions taken by Gordon Brown. Brown initially made the same errors as Paulson but did not share Paulson's ideological priors: (partially) nationalizing the banks allowed a New Labour politician to indulge Old Labour instincts.

3. A near-consensus had emerged among economists that something like the Brown plan--government purchase of an equity stake in banks plus loan guarantees--was much superior to the Paulson plan. The backing of experts mattered, though the experts often hedged their positions with considerable doubt and uncertainty, and how could they not, since so many facts remain unclear.

4. Europe's problem is more narrowly circumscribed than America's. In addition, the clash between Merkel and Sarkozy probably helped the Brown plan, since it came from neither of them. Furthermore, Merkel's initial opposition to coordinated action seems to have collapsed when she realized the size of the Hypo Real Estate failure--a German problem that might be too big for Germany to solve.

5. The existence of so many transnational banks subject to regulators in different countries (Fortis is a case in point) made some kind of coordination inevitable.

6. For Europeans, (partial) state ownership of banks is nothing new.

7. European politicians of all stripes are more deferential to economic technicians than some American Congressmen, so the possibility of a legislative revolt against the emergency measures by the executive was limited.

8. Europe's crisis is not complicated by the politics of a presidential election.

9. The political leadership in the UK, France, Germany, and the EU is more competent and economically literate than the U.S. president and is not handicapped by lame-duck status, although it is noteworthy that Brown and Sarkozy were able to lead forcefully despite low approval ratings and that Merkel came round despite losses by the right in recent regional elections.

ADDENDUM: I should say that the U.S. might have come to the new Treasury plan without the European example; things were already moving in that direction. But once Europe decided to guarantee deposits and interbank loans, the U.S. really had no choice; assets would have flown to safety in Europe without similar guarantees here. I suppose this could have been done without the equity infusion, but that would have been foolhardy. The fateful step that has yet to be taken is the acquisition of voting shares in the banks; the preferred shares to be acquired under the Paulson plan will be non-voting. And the exit strategy remains to be defined, so the U.S. government may be in banks far longer than it will remain in Iraq.

Some or all of these points may be wrong, but they provide a basis for discussion.

A good narrative of the process leading to accord can be found here.


Anonymous said...

very concise and helpful points.
I'd just like to contextualize number 7 with remarks that concur with previous comments on the necessary route of dealing with Congress which slowed things down. That is, I'd say it is not lack of deference to economic expertise, but rather open defiance and lack of trust in the White House. "Yet again", grumble some, "the president demands that we sign a blank check handing over god-knows-what kind of discretionary powers". In the wake of the Patriot Act & Iraq war, no more trust was to be accorded...

btw, I'm looking for the info again but I thought I came across data indicating that the American bailout of 700 gazillion centimes (old French francs) is "merely" 5% of the US economy whereas the exposures of German bank losses represented about 20%. And same for the UK. I hate being so imprecise but the percentiles & what they possibly signify caught my eye.

Chris P.

Anonymous said...

I am not sure that a consensus would have been achieved on its merits only, that all national particular interests and natural reluctance to act would have been overcome, and in such a short time, without Sarkozy's driving force.

Merkel was playing Deutschland unber alles, Gordon had good ideas but was not in the decision loop, the Commission was brain-dead..
Who else ?

Do you think the same result would have been achieved if Poland or Malta happened to preside over Europe during this crisis ? or some French Chirac-like roi fainéant ?

Anonymous said...

I think it is difficult to overestimate the importance of item 6. Even European conservatives do not have the same knee-jerk prejudice as so many Americans, whether Democrats or Republicans, against government ownership of anything. To my mind, that item probably made an enormous difference in approach.

Unknown said...

anonymous, Yes, I agree, and the point is amplified by the fact that European assistance is conditioned on voting rights and bank board membership, whereas these conditions are explicitly omitted from the US plan (unless banks fail to pay dividends for six quarters, in which case the gov't can nominate board members). The US will obtain only warrants to purchase common stock later and promises not to do so unless conditions worsen.