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they arose. But in all likelihood the Fund would not lose, but rather would make
money, because its funding costs would be much lower than that of member states
and because its existence would stabilise European financial markets. Germany,
which so far has opposed this idea, might be the biggest beneficiary because German
banks are likely to be its biggest customer, Germany’s automobile industry would
gain most from a stabilisation of the European banking sector and Germany’s
exporters would gain most from a stabilisation of the European periphery.
This Fund could be set up quickly at the European Investment Bank, which
already exists as a solid institution with the necessary expertise. (Technically the
EIB is an agency of EU governments whose board of governors includes the ministers
of finance of member countries). A fund run be a European institution
would lead to a different political economy dynamic since national finance ministers
will have an interest to see it wound down once financial markets operate
again normally. By contrast, it will be much more difficult to end national support
schemes since no finance minister will want to be the first one to withdraw support
for his or her national champions.
The resources available to the EFSF would be used mainly for bank recapitalisation,
especially for those banks which rather ‘gamble for resurrection’ than accept
the presence of heavy handed interference of national governments. Moreover,
the EFSF could also beef up the funding of existing EU instruments for balance of
payments assistance to the European neighbourhood. But a key consideration in
setting up such an emergency fund should not be the problems that are already
known. Given the unpredictable nature of this crisis, a key consideration should
be for the EU to prepare for the ‘unknown unknowns’ that are certain to arrive
sooner rather than later.
President Sarkozy has recently called for the creation of an economic government
for the euro area. Under normal circumstances one would have replied that
the economic governance of the euro area was assured by the independence of the
ECB and the Stability Pact. This is clearly no longer sufficient when Europe is facing
the worst economic and financial crisis since World War II. The speed and
depth of the crisis have clearly overwhelmed the usual decision making mecha-
A call for a European Financial Stability Fund 87
nisms. Europe needs action on a scale that can only be decided at the highest
political level.
88 The First Global Financial Crisis of the 21st Century Part II
29 September 2008
When the storm passes, bank regulation will top the global policy agenda. This
column presents new evidence that a bank’s private governance structure influences
its reaction to bank regulation. Since governance structures differ systematically

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