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A complete review on -European summit on the global financial crisis

By Amarendra Bhushan for CEOWORLD Magazine Updated:October 5, 2008

French President Nicolas Sarkozy hosted the hastily-called meeting of the leaders of Britain, Germany, and Italy in Paris, as the financial plague which started on Wall Street continues to spread through the world economy. European leaders have opened a summit in Paris on the financial crisis, with Britain’s prime minister saying no strong bank should be allo wed to fail. British Prime Minister Gordon Brown says no bank should be go under through a lack of solvency. French President Nicolas Sarkozy is hosting the meeting on Saturday. He says the economic crisis is a global problem that needs a global response. German Chancellor Angela Merkel says financiers must help find a solution, but politicians also must shoulder some responsibility. Unlike the United States, which earmarked $US700 billion ($900 million) of government revenue last week to shore up Wall Street, Europe will continue dealing with its financial problems case by case. That approach, which has involved tens of billions of dollars at a step, is complicated by the transnational presence of so many large European financial institutions. European leaders were gathering in the French capital Saturday for a summit on the global financial crisis. French President Nicolas Sarkozy planned to meet with British Prime Minister Gordon Brown, German Chancellor Angela Merkel, and Italian Prime Minister Silvio Berlusconi.

Mr Sarkozy, Europe’s most vocal advocate of a continent-wide response, announced that in four hours of discussions he and the leaders of Britain, Germany and Italy had for now agreed only that each country would use “its own means” to safeguard banks from collapse, but would do so “in a co-ordinated way”. Though they did not agree on a broad bailout along the lines of the $700 billion package that President Bush signed into law on Friday, the leaders of France, Germany, Britain and Italy pledged to prevent a bankruptcy on this side of the Atlantic like the one that brought down the Lehman Brothers investment bank in New York.

The outcome seemed to fall well short of the common policy that French and other officials had spoken of in recent days amid a rapid series of financial failures and a freezing up of the capital markets in Europe, which rival or by some measures exceed the size of the US markets. The disunity in Europe was also apparent in complaints by some other countries that they were not included in the discussion. The move prompted the British government to raise its deposit insurance to 50,000 pounds, or $88,500, from 35,000 pounds, or about $62,000, because of concerns that British savers might abandon their banks for the comparative safety of Irish banks.

Failure to pursue a broader bail-out reflected particularly strong opposition from the German Chancellor, Angela Merkel, and the British Prime Minister, Gordon Brown, to any attempt at pooling resources for a Europe-wide fund to protect weak banks. European leaders have asked India to join a major economic summit to prepare a response to the global financial meltdown sparked by the US credit crisis. At a hastily convened meeting in Paris, French President Nicolas Sarkozy called for a summit in November where emerging powers India, China and Brazil should join the Group of Eight industrialised nations — Britain, Canada, France, Italy, Japan, Germany, Russia and the United States.

He said the heads of the European Union’s four biggest economies – Germany, France, the UK and Italy – were united on the need to call all leading economic nations together to create “a new financial world just as Bretton Woods did 60 years ago”. Sarkozy, who called last night’s meeting in his role as EU President, said it was time for governments to clamp down on speculators and restore a moral element to the heart of a regime that had failed. The solvency of Europe’s banks was of paramount importance, British Prime Minister Gordon Brown said.

“No sound solvent bank should be allowed to fail for lack of liquidity.” Keen eyes will be on markets around the world as they open today to see what impact the weekend’s announcements will have. Some commentators said the almost 1.5 per cent slump Wall St markets took as the US$700 billion (NZ$1 trillion) bailout bill passed in the United States Congress showed renewed confidence was still a way off.

“We need to literally rebuild the international financial system. We want to lay the foundations of entrepreneurial capitalism, not speculative capitalism,” he said. As part of a rolling program of announcements, the EU’s “big four” agreed to release USD 24 billion of emergency aid to ailing small businesses across the E.U. Immediately, and a further 12 billion pounds as soon as possible after that. Germany repeated its opposition to the use of taxpayers’ funds to help ailing banks. French President Nicolas Sarkozy, Europe’s most vocal advocate of a continent-wide response, announced that for now, he and the leaders of Britain, Germany and Italy agreed each country would use “its own means” to safeguard banks from collapse but would do so “in a coordinated way.”

Governments across Europe have intervened to save five banks within the past week. But in a sign of the challenge ahead, one of those deals, a bid to rescue one of Germany’s biggest property lenders, Hypo Real Estate, collapsed Saturday when commercial banks withdrew their support of the plan. The summit call was made in Paris on Saturday by French President Nicolas Sarkozy after a meeting on the global economic crisis between him and the leaders of Britain, Germany and Italy. France currently holds the rotating presidency of the 27-nation European Union.

The emergency summit among Europe’s big four was an attempt to allay some of the fears sweeping the continent, fears held by financial institutions and individual investors alike. European leaders have invited India to join in an emergency global summit on rebuilding the world’s financial system.

“This is a trial by fire,” said Dominique Strauss-Kahn, managing director of the International Monetary Fund, who met with Sarkozy at the Elysee Palace, Sarkozy’s official residence, before the summit began. “Europe … needs to show it is capable of responding in a crisis.” Britain’s bank regulator, the Financial Services Authority, increased its insurance ceiling to £50,000 ($114,500) per account from £35,000 to stem a flow of funds to Ireland.

Their joint statement called for a global summit “as soon as possible” to implement “a real and complete reform of the international financial system”. Mr Sarkozy said “all actors” must be supervised, including rating firms and hedge funds. “We want a new world to come out of this,” the French President said. “We want to set up the basis for a capitalism of entrepreneurs, not speculators.” Anticipating increased spending, declining tax revenue and government bank takeovers, the leaders called for “greater flexibility” in the application of EU competition and budget rules. Also expected to attend is Luxembourg Prime Minister Jean-Claude Juncker, who heads the Eurogroup, comprising the finance ministers of all 15 countries using the euro. European Commission President Jose Manuel Barroso and European Central Bank President Jean Claude Trichet were also expected at the summit. After U.S. President George W. Bush signed off on a 700-billion-dollar handout to Wall Street, the financial world’s eyes turned to Europe in the hope of more measures to free up capital and reassure jumpy markets.

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