Does the financial crisis reveal a failure of American deregulation compared to better conceived European regulatory schemes? This thesis is shared by many, especially here in Europe where some see the current financial crisis as the proof of the superiority of the European “social market economy” over “cow-boy capitalism”.
This view isn’t much grounded. Going back in time just a couple of years, before the subprime mess erupted, a major concern of observers was US finance being far too much regulated, with investors fleeing to the EU. New York was widely perceived as losing ground, as a financial center. Plus, if American deregulation is what caused the crisis, Europeans should explain why they don’t look really in a better shape these days.
Let’s look at two key critical issues, in the crisis: overleveraging and private debt.
Speaking about banks’ overleveraging, many of the largest and most highly regulated European commercial banks were much more leveraged than those supposedly unregulated American investment banks. Indeed, they were thus hit by the crisis right after its inception, in the fall of 2007.
Speaking about unsustainable levels of household debt, in many European countries the ratio of household debt to disposable income is as large or even larger than in the U.S. According to the OECD, this ratio is 107% in Germany and Spain, 134% in Sweden, 135% in the U.S., 141% in Ireland and 159% in the U.K. It reaches as high as 246% in Holland and 260% in Denmark. If Americans lived beyond their means, Danish or Irish were not frugal too.
This crisis has turned out to be “regulation-blind”. It developed because of factors other than “excessive deregulation”. Newer regulations are thus not very likely to get us out of it.
Alberto is Director General of the Bruno Leoni Institute