It is only human to search for a ray of light in the European Union’s ever-darkening financial landscape. Could it take the form of an unexpected boost to the cause of EU political and economic integration?

One such optimist, a genial and perceptive diplomat who has immersed himself in EU affairs for the past 30 years, suggested to me the other day that it often takes a crisis to inject real momentum into what he and others in Brussels like to call “the European project”.  For example, the 1992 crisis in the European exchange mechanism appeared to deal a serious blow to the goal of creating a single European currency. But the reaction was spirited. Only seven years later, the euro was up and running.

Similarly, it took the 9/11 terrorist attacks on New York and Washington in September 2001 to prompt EU leaders into agreeing, at a summit just three months later, on the principle of a European arrest warrant. This allows the swift transfer of criminal suspects for trial and detention from one EU member-state to another. It proved effective in securing the extradition from Italy to the UK of Hussain Osman, an Ethiopian-born Briton accused of involvement in a plot to attack London’s transport system in July 2005.

On the face of things, the financial crisis offers a perfect opportunity to push forward closer European integration. If a big cross-border European financial institution fell into trouble , it would be ludicrous to argue that it was purely a matter for the government of the country where the institution has its headquarters. Tommaso Padoa-Schioppa, the former Italian finance minister and European Central Bank executive board member, thinks the financial crisis merely reinforces the case for a powerful pan-European regulator that he used to make in front of his EU colleagues.

However, the response of governments so far indicates that they are not ready - yet - for a Great Leap Forward in terms of closer integration. This was well illustrated last week by the curious tale of the French plan for European bank bail-out fund, which turned out, after a feverish 24-hour news cycle, not to be a French plan for a European bank bail-out after all.

Only the Dutch authorities were brave enough to state publicly that, yes, they thought such a plan would be a pretty good idea. But given the opposition of the UK and , more importantly, Germany - still the EU’s paymaster and the country that would surely bear the brunt of the cost of such a fund - the plan was dead before it started.

Of course, European integration can come in many shapes and sizes and an EU bank bail-out fund doesn’t have to be one of them. But solidarity among all 27 EU member-states is a a fundamental principle. Without it, the EU is nothing. If a large bank fails in an EU country that does not have the resources to rescue it, it will not be long before that principle is put to the test.

October 6, 2008 10:38am in Financial crisis | Comment