20th Jan 2022

Financial crisis testing EU foundations, says Stiglitz

Nobel prize winner in economics, Joseph Stiglitz, says the financial crisis is forcing the EU to re-examine its cornerstone policy area – the single market.

"The crisis has brought home a couple of fundamental questions for the single market concept of Europe that have not really been adequately discussed," said the star economist at a conference on banking regulation in Brussels on Monday (12 October).

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  • Joseph Stiglitz warned the financial crisis was testing the EU's single market (Photo: apesphere)

Referring to the banking collapses in Ireland and Iceland late last year, Mr Stiglitz said financial regulation in one country clearly presented problems for depositors in other countries. "And we need to get a grasp on that," he said.

But the former World Bank economist, turned critic of its sister organisation the International Monetary Fund, questioned whether Europe was now dealing with such economies correctly.

"The current solution which is to put undue burdens on those particular countries that followed the model of deregulation is one that we might want to question," he said.

Since member states pumped billions into banks facing meltdown last year, the European Commission has increasingly said that governments need to stem ballooning budget deficits in order not to saddle future generations with mountains of debt.

But member states have shown varying degrees of enthusiasm when it comes to reigning in deficits, with all agreeing a solid economic recovery must be secured first.

Financial contagion

The single market theme was later picked up by the EU's economy commissioner, Joaquin Almunia, who warned that differences in financial regulation across the EU pose a dangerous threat to the bloc's internal market.

While global tax havens have drawn greater scrutiny following the break-out of the financial crisis over a year ago, Mr Almunia said it was vital that the EU iron out its own in-house discrepancies or risk contagion to the real economy.

"If we are not able to protect the internal market in the financial sector, we will immediately encounter problems in implementing our competition and state aid rules," said the Spanish commissioner who is seeking a second term in the economy post.

"We know from our Brussels platform how difficult it is to protect the internal market during a crisis such as this," he said.

The comments come as member states and the European Parliament currently examine draft proposals on a new EU framework for financial supervision put forward by the European Commission last month.

These, combined with draft measures released before the summer on greater regulation of Europe's hedge fund sector, make up the core of the EU's response to the financial crisis.

Regulatory capture

But advocates of greater regulation fear recent indications that Europe may be clawing its way out of recession could put the breaks on the proposed initiatives.

In particular, they worry that the banking sector's substantial influence will end up silencing attempts at real reform.

"My fear is that nothing will happen. This is dangerous because if we look at the costs of the financial crisis, we can see that in Europe we have lost six to seven percent of GDP," said MEP Poul Nyrup Rasmussen, who is also president of the Party of European Socialists.

Mr Rasmussen says many in the financial sector are working overtime to see the hedge fund proposals watered down, referring to a recent visit by the mayor of London, Boris Johnson.

"In that last two weeks, you even saw the mayor of London here in Brussels. We looked into his campaign funding and it looks like more that 60 percent of his campaign costs were covered by hedge funds," said the former Danish prime minister.

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