August 21, 2014 | by JUSTINE DOODY
Which countries in the European Union are helping to stabilize the global financial system, and how? The latest edition of the Bertelsmann Stiftung’s Sustainable Governance Indicators gives some answers.
The global economic crisis, from which the world is still struggling to escape, began as a banking crisis in the United States. It spread to Europe through the European banks that were heavily invested in the US financial sector. And when it did, the shortcomings of European Union member states’ financial management were soon exposed. As governments rushed to prop up failing banks, what began as a financial sector problem turned into a sovereign debt crisis. In response, after all the bailouts and the oversight programs, the European Union has worked to introduce new rules for fiscal policy and new financing facilities to help out member states in need.
The EU, as the world’s largest economy, has a great deal of power to drive regulation and to stabilize global markets. But the EU is the sum of its constituent parts, and without strong will from its member states, the progress that can be made at a supranational level is limited. So, which member states are working to help solve the problem, and which are not pulling their weight?
Finland, Germany and Sweden top
In the latest edition of the Bertelsmann Stiftung’s Sustainable Governance Indicators (SGI), Finland, Germany and Sweden top the rankings of 41 OECD and EU countries on the indicator “Stabilizing global financial markets,” which answers the question, “To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?” Perhaps unsurprisingly, each of these countries also performs well on the SGI rankings for domestic budgetary policy, with Sweden and Finland coming top out of the 41 countries surveyed and Germany 13th.
Finland has worked hard to increase its own domestic regulation and to create sustainable fiscal policy. In 2013, the government approved a Stability Program setting out fiscal policy for governing Finnish economic development, as well as a Europe 2020 National Program laying out measures to meet national targets based on the EU’s Europe 2020 growth strategy.
Finland has strongly backed EU efforts to combat banking risk and to increase regulation. Finnish policymakers are closely involved in EU efforts to reform financial oversight systems: for example, the governor of the Finnish Central Bank, Erkki Liikanen, headed up the EU’s working group on banking sector reforms in 2012. The working group’s findings led to a 2014 European Commission proposal for regulating banks’ ability to engage in risky trading.
Germany is often seen as the driver of EU fiscal policy. And indeed, Germany’s post-crisis regulatory framework, the “Restructuring Act” introduced in 2010, is providing a model for EU regulation on issues such as how to deal with insolvent banks. Germany supplied a financial guarantee of €190 billion to the European Stability Mechanism, set up as a permanent crisis resolution mechanism to give financial assistance to troubled EU member states in the case of future crises. Some fear that this guarantee exposes the German economy to risk, but policymakers believe that it is in Germany’s interests to promote the success of the EU economy as a whole.
The SGI report also notes that Germany has pushed to transform the G20 into a serious and vital forum for international cooperation, hoping to use this grouping as a means to put pressure on developed economies to reform the global financial system.
Sweden’s economy emerged largely unscathed from the global economic crisis. The country experienced its own serious financial crisis in the early 1990s, and afterwards, the Swedish government carried out reforms aimed at instating fiscal sustainability. These reforms largely insulated the country from the worst effects of the global downturn. Sweden’s banks did suffer due to their deep investment in the hard-hit Baltic States, but government acted swiftly in 2008 to prop up troubled lenders, and the banking industry has emerged strong. Even so, perhaps because of its own experience, Sweden has been extremely supportive of efforts to enforce regulations in international finance by the EU and by other international bodies.
The United Kingdom could be expected to do better
The City of London plays a central role in the global financial system, and so the United Kingdom, it could be expected, should take a leading role in helping to solve a problem that it had a hand in creating. However, in the SGI rankings, the UK comes only 14th on the indicator “Stabilizing global financial markets,” on a par with crisis-stricken Spain. The City’s light-touch regulation contributed to the underlying problems in global finance that caused the economic crisis. And Britain has faced its own financial sector shocks, with the collapse of the Northern Rock bank in 2007 as one of the earliest indications of the emerging international crisis.
Calls for regulation have grown, especially after the Libor rate-fixing scandal of 2012. To address public sentiment, the UK government revisited the country’s financial regulation system in the Financial Service Act of 2012. This began the work of increasing oversight on the financial sector, with the establishment of the Prudential Regulation Authority and the Financial Conduct Authority, both monitored by the Financial Policy Committee, a subsection of the Bank of England.
However, although it has taken steps to increase domestic regulation, Britain has not done much to increase supranational regulation, preferring instead to protect the City’s interests in the face of increasing competition from abroad. Britain is especially eager to protect the power of the City of London in light of other EU member states’ desire to wrest some control of trade in the Eurozone from the non-Eurozone markets of the UK. France in particular hopes to create a place for itself at the heart of a Eurozone banking system. And as Britain’s future within the EU looks less and less secure, its government prefers to take whatever steps are necessary to shore up the country’s financial sector, which employs more than 2 million people in the UK and contributes around 10 percent of GDP.