Market fundamentalists display astonishing chutzpah when they claim that the solution to the financial crisis is cutting regulation or relying on self-regulation within the City. The reality is that it is the abject failure of financial markets to self-regulate and an overly laissez-faire regulatory regime that has created this crisis, leaving governments with little choice but to bail out banks, lest the entire financial system collapses - a scenario that, in Yorkshire alone, would instantly put thousands out of work.
What is needed is better and more effective (though not excessive) regulation and intervention. As we are part of a highly integrated European market, this includes some European co-ordination and even regulation. This would be a more effective way forward than each country rushing to regulate its own patch in an uncoordinated way.
We have seen over the last few days how uncoordinated action by national authorities can cause as many problems as it solves. A seemingly welcome national measure can have harmful knock-on effects on other countries. Ireland's unilateral announcement that it would guarantee all deposits at its six banks, has already led to large commercial deposits being switched from unguaranteed banks in other countries, maybe in Halifax, Leeds or Amsterdam.
We should start by revisiting existing common European rules. For example, this week the European Parliament and EU Finance Ministers debated " Solvency II", which would toughen up our common market rules on the risk and capital management systems of insurance companies and reduce the risk of insurance company failure. It has been widely welcomed by industry. When finalised, hopefully within the coming weeks, Solvency II should stand as a model to follow.
A 'let's go it alone' attitude won't work. In Europe , which has an increasingly integrated financial market, there is a risk that new rafts of separate and diverging national regulations lead to fragmentation of this market, with duplication and extra bureaucracy adding to costs and instability. Those wanting to 'go it alone' should realise that this leads to more bureaucracy, costs and instability. This would aggravate the current chaos, threaten jobs and trigger rivalries, with governments forced to out-bid each other in order to stem financial flows caused simply by different national approaches. Coordination is desperately needed, rather than 'beggar thy neighbour' politics.
Uncoordinated national actions open up a bidding war in which the countries whose financial institutions have had their fingers most badly burnt by toxic sub-prime debt will simply not be able to compete. Moreover, we have to bear in mind the sheer scale of the liabilities that we are asking taxpayers to underwrite. The Irish €400 billion guarantee package is more than double Ireland 's annual GDP. For Britain to the do same, just for our five largest banks, would mean the taxpayer underwriting a sum that would exceed our annual GDP four times over. And unlike Ireland , which is sheltered in the eurozone, we still have a separate currency to defend which would be highly vulnerable in such circumstances.
The crisis has indeed demonstrated the value of the single currency to those in the eurozone. Imagine that, instead of the euro, we still had the peseta, the lira, the Irish punt, French francs, etc. It is highly likely that they would have responded differently on exchange markets, and some might have been subject to speculative attack. Currency market turmoil would have added to the instability, aggravating the crisis. Instead, the bulk of Europe's common market was able to rely on a stable and strong currency to help weather the storm, with the Financial Times' former bureau chief Stewart Fleming arguing that "the eurozone is (once again) coping with the turbulence far better that would have been the case if the nation states of the eurozone had still been clinging to their national currencies".
Meanwhile, Will Hutton has gone further, arguing that joining the euro is the only way Britain can secure the future of its banks and economy. The decision as to when or whether Britain should join the single currency is, of course, highly charged both politically and economically and should not be rushed. But we should not ignore that the pound, with its floating exchange rate, is highly vulnerable to being squeezed between the twin currency giants of the euro and the dollar.
The financial meltdown of the sub-prime crisis is terrifying but, at the same time, an opportunity for us to re-draw the economic rules of the game. Our financial institutions sector must be based on rules which are firmer, fairer and clearer, and, given the level of integration of our financial markets and economic interdependence, it makes sense to do much of this at European level in order to protect each nation from unfair competition. In contrast, all unreconstructed market fundamentalists have to offer us is more of the same Thatcherite dogma which has proven to be intellectually and (literally) economically bankrupt.