Find Insurance Online

On May 18, 2010, the German state legislature banned naked short-selling of certain euro-debt and credit-default swaps, as well as some financial stocks because it was believed that “excessive price movements” could endanger the stability of the financial system. In an interview with Frankfurter Allgemeine Sonntagszeitung, Wolfgang Schauble, the Finance Minister at the time, said that the “financial market is only concerned with itself, instead of fulfilling its purpose and financing sensible, sustainable economic growth.” The legislation runs counter to a race to the bottom in which governments relax financial regulation to entice the banking sector. At the same time, however, the American state governments and that of their union seemed like apologists for the industry they are supposed to be regulating.  In fact, Tim Geithner, the U.S. Treasury Secretary, did not waste any time in criticizing the E.U. state for the legislation. While doing so, he dismissed the German Chancellor's proposal for a global financial transactions tax (the proceeds of which would go into an emergency fund to divert a collapse of the financial system). To be sure, while the European proposals were a healthy sign of government not enslaved by the money and power of big business, the problem of banks too big to fail still existing was not tackled. Furthermore, whereas Americans may be too insular, the Europeans may be unrealistic in their visions for global regulation. Indeed, many tend to conflate their own union with an international organization.

The main problem with the German’s international proposal for a financial transaction tax is that it does not distinguish between the EU, which is a federal system according to Quentin Peel of the Financial Times, and international institutions.  It is much more difficult to get an international regulation than one in a federal union such as the EU or US.  The Europeans would be better served in focusing on the EU in instituting the tax.
If the EU proffers comparably less influence for its financial sector, or has a stronger left relative to the financial interest, then the European financial reform is likely to protect Europe more than the US financial reform will protect the US.  However, as Quentin Peel stated on Quadriga on DW-TW (May 21, 2010), more political union will be necessary, at least covering the states having the euro (“euro-zone countries” is a subterfuge that ignores the existence of the EU).

Even though the US and EU have different divisions of power, part of the difference regarding prospective financial reform is cultural. To the extent that a society at hand views liberty in an economic sense (i.e., identifying its own well-being in terms of that of its business sectors), regulation of business is apt to be mitigated or relegated. I contend that in America the culture is more pro-business than in Europe. Rand Paul (R-Kentucky), for example, characterized Barak Obama’s blame on BP regarding the oil spill in the Gulf of Mexico as “sounding un-American.” While Mr. Paul’s comment might have received a sympathetic reception by a segment of the American population, such a reception would be unlikely in Europe were a politician in the EU to make a similar comment.  So, in spite of substantial power still residing at the member-state level, I submit that there is less risk of E.U. state governments trying to out-do eachother in a race to the bottom in terms of financial regulation--the cultural check on business being stronger in Europe than in America. The relatively pro-business cultural values in the U.S. mean that even though the U.S. Government is an effective check on any such race among the American state governments, there is apt to be relatively wan financial regulation even in the wake of a financial crisis in which Wall Street was culpable. Cultural values, moreover, impact federal systems with respect to government regulation as a check on business.

Source: WSJ, May 27, 2010, p. A12