Europe and the market

Friday, November 7

Thanks to the financial crisis, the economic model driven by financial market liberalisation is apparently being replaced by a system in which the state is involved as a significant shareholder in major banking firms, and where more extensive regulation is likely to ensue.  In a bid to address both the credit crisis and the economic downturn, governments also appear willing to engage in borrowing and spending on a major scale.

These developments raise the question of the extent to which these changes mark a real change in the balance between state and market in Europe. Three aspects of the economic system -- ownership, regulation and fiscal policy -- stand out as indicators of the changes under way.

• Ownership. The role of the state as a major shareholder is still being worked out. Earlier this week the UK government announced the establishment of a holding company, which would manage the state's assets in the various banks it has recapitalised or taken over. The government made it clear that the new entity would be tasked with ensuring that the banks pursued value with the aim of generating a healthy return for taxpayers and ultimately selling the shares at a premium. Yet in other statements, ministers have indicated that they want the banks to maintain levels of lending to households and business as well as to curb the 'bonus culture' in the sector, which are signs of a more activist shareholder position. The vehicles for the state's new investments in other countries -- for example, in France -- may also be expected to play a more active role in steering the sector.

• Regulation. For financial services at least, the era of light touch regulation is at an end.  However, the combined impact of the financial crisis and economic downturn on the direction of regulation is still unclear. Wider difficulties may be invoked to put on hold cost-increasing regulations in areas such as social policy and environmental protection. Yet some groups (businesses as well as unions) may use the crises to scale back liberalisation and state aid control.

• Public borrowing and spending. Another indicator of a sea change in economic policy has been the willingness of governments to 'borrow and spend' to address both the financial and economic problems.  This return to Keynesian policy has been largely presented as a relatively modest and short-term expediency. Moreover, beyond the immediate crisis, it is likely that a more rigorous fiscal policy will be applied that may entail quite painful cuts to public spending. At the moment, these changes do not imply a major reorientation of the way in which European economies will be governed. Changes in the regulatory framework for the financial sector will have a wider impact, but a major rethinking of the direction and priorities of other elements of economic policy is not apparent.

In this context, the EU -- and particularly the European Commission -- is likely to maintain its overall policy approach. There may be some relaxation of state aid and fiscal rules to give national governments more room for manoeuvre in bailing out and borrowing. There might also be attempts to use the limited budgetary resources of the EU to stimulate demand and cushion the pain of adjustment (such as the mooted extension of the EU 'Globalisation Fund'). However, the Commission is unlikely to reverse its current priorities in areas such as competition and the single market. Indeed, a number Commissioners have restated their commitment to liberalisation as essential to overcoming the recession.