Europe must strengthen exisiting financial regulations

The financial sector crisis has left governments with little choice but to bail out banks, lest the entire financial system collapses, yet these same banks were embarking on high-risk strategies while paying obscene bonuses only a few months ago.

Understandably, this has given rise to calls for better regulation of financial markets. 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. Reivisiting existing common rules to tighten them up where necessary would seem to be a more effective way forward than each country rushing to regulate its own patch in an uncoordinated way.

Even a seemingly welcome national measure can have harmful knock-on effects on other countries. Ireland's announcement that it would guarantee all deposits at its six banks, could lead to large commercial deposits being switched from un-guaranteed banks in other countries, especially those considered vulnerable, maybe in Halifax, Amsterdam or Paris. 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. Co-ordination is desparately needed.