UAE Moves on Crisis

It has taken a long time for governments and central banks to wake up to the fact that a global financial crisis calls for a global financial solution. Yet again delay and disarray stalk the corridors of power in Europe.

Coordinated action is vital to bring about economic healing on a significant enough scale that it stimulates confidence. We are seeing the beginning of joint efforts in Europe led by the UK government that has effectively become a major shareholder in RBS, HBOS and Lloyds TSB by injecting 37 billion pounds. Goodbye free markets, hello taxpayer. Will it work? Early reaction from the markets suggests the initiative may fail to gain momentum and prompt banks to start lending to each other again.

The only bank to resist is Barclays that is hoping to raise 6 billion pounds from its own sources. However, occasionally hope is deceitful. France, Germany and Spain look set to follow suit with their own bailout plans. For too long policymakers have been obsessed with doing the right thing and markets have seized upon the uncertainty with a vengeance. The only way to overcome frozen credit markets around the world is to devise a new global financial paradigm. In this respect, British prime minister Gordon Brown is right by proposing a 21st century Bretton Woods type agreement that saw the onset of the post war financial order. He should be thinking big — the UK has the bleakest economic outlook in Europe and faces the prospect of a shrinking economy in the next three years.

Fixing the global financial system will be one thing, but fixing the global economy will be quite another. There were already signs of growing protectionism long before Lehman Brothers appeared on the scene. Lack of credit will soon filter down to shrinking trade between nations that will have few beneficiaries. For all that China and to some extent India are two of them. Without doubt, this is one of the greatest and historic shifts in economic power in the form of a complex rebalancing of the world order.