Internationale Politikanalyse International Policy Analysis Christian Kellermann Europe’s Leverage in Financial Market Regulation The financial crisis that originated in the USA last summer has had major repercussions in Europe. In Germany as well as in other EU member states, news stories and scandals broke concerning billion-dollar bank writedowns as a result of loan defaults related to the US real estate market. The markets still have not settled down as reports of new losses continue to surface. Calls for stronger regulation of financial markets and their actors have increased for about ten years ever since the Asian crisis sent shockwaves around the world. They have still not been heard and action is more imperative than ever. As of yet, the extent of the current credit crisis can not be estimated and cen­tral banks continue to be faced by an opaque network of shady credit constructions. National financial centres can do little in this storm. The European Union has greater leverage on account of its size and its weight in the international financial markets to work towards stricter regulations. The present crisis could there­fore serve as a catalyst for tightening regulations in the EU itself, as well as global regulations. Continuing a policy of‘ laissez faire’ and timid statements about greater transparency are certain to lead to yet another crisis. Dr. Christian Kellermann works with the International Policy Analysis Unit of the Friedrich-Ebert-Stiftung in Berlin. Contact: Christian.Keller­mann@fes.de Drivers of the Subprime Crisis In the last few years real estate markets and private consumption in the USA have goaded each other on to the extent that exces­sive indebtedness has reached dangerous levels. This indebted­ness – both household and public – was financed by the enor­mous influx of foreign capital. About six months ago confidence waned in the sustainability of the debt-driven US consumer boom. Financial difficulties emerged in particular in the case of subprime mortgages, with repercussions for extremely complex credit chains that had come into being as a result of the securi­tisation and resale of credit risks through special purpose vehicles and their financial products. Subsequently, the uncertainty and intransparency of many banks’ risk exposure in the subprime market led to a crisis of confidence in the interbank market re­sulting in massive liquidity bottlenecks. This problem could not be solved in a sustainable way, despite enormous cash infusions by central banks of the USA and the Eurozone. This is why the crisis of confidence in the financial markets spread, causing se­curities markets to plummet through the floor(see Kellermann 2007). The full extent of the repercussions that the credit and finan­cial crisis will have on the“real” economy – that is, manufactur­ing industry, consumers, and so on – are still difficult to gauge. Corrected growth forecasts have sent a clear message to the euro area: Germany in particular, which is heavily dependent on the US market, has to prepare itself for a drop in growth(Bun­SEPTEMBER 2008