EU Won't Manage Unified Banking Plan

The European Union will not respond with a U.S.-style bailout package to the current crisis but it will probably decide to guarantee all private deposits in banks across its territory to boost citizens' confidence in financial institutions, analysts told CNBC on Tuesday.

AP European Union

Ireland was the first to take such a measure last month, offering a blanket guarantee to all depositors in its banks and prompting a flight of capital to Irish financial institutions as well as the outspoken wrath of neighboring Britain.

Other EU members were forced to follow suit, with richest member Germany guaranteeing all private deposits in its banks, a step which was rapidly imitated by other countries, while others, like Sweden, warned that "one country's solution is another's problem" and called for a common solution to the financial crisis.

>>> Click here for a slideshow on deposit guarantees so far <<<

Budget is 'Peanuts'

But little else is likely to be decided apart from guaranteeing deposits, partly because of political wrangling and partly because the European Union, unlike the U.S., does not have a federal budget to fund generous bailouts, ING Bank's EU analyst Carsten Brzeski told CNBC.com.

"The EU has a budget of 1 percent of the Union's gross domestic product. It's peanuts," Brzeski said.

This is already used to subsidize farmers and to fund various projects to improve infrastructure in impoverished rural areas.

EU leaders have paid lip service to coordinated action but little can actually be achieved, as each member state is first looking at its own backyard.

"The Euro group should be taking initiatives and Europe together as early as possible," EU Monetary Affairs Commissioner Joaquin Almunia said late on Monday, after a meeting of finance ministers.

"An overall initiative should concentrate on rapidity regarding deposit guarantees ... We need to avoid negative consequences of unilateral decisions, we have seen some already," Almunia added.

Running Behind the Facts

But the EU's executive body, the European Commission, has been slow to respond to the crisis and may find its political clout weakened as a result, because member states have already taken steps without its consultation or blessing.

"The European Commission is running behind the facts," Brzeski said. "The action is more in states' capitals than in Brussels."

In normal times, the Irish decision would have been met with an inquiry into whether it breaches EU competition rules, as Britain has already complained that it does, but, as European Central Bank President Jean-Claude Trichet keeps reminding markets, these are exceptional times.

The European Commission would be seen as undermining the work of countries that are at least doing something to restore confidence in banks had it not tolerated the Irish decision and states breaching the budget deficit limit of 3 percent of GDP. All it can do now is try to broker some sort of agreement between EU countries.

"I would take what Germany decided (on deposits) as the European standard," said Brzeski.

In addition, politicians face a huge potential backlash from taxpayers already reluctant to bail out banks if a coordinated plan was perceived as bailing out struggling nations and the expense of more fiscally sounds ones.

The lack of a coordinated response to the crisis has been reflected in the single European currency, which has weakened more than 13 percent against the dollar over the past six months.

If the financial meltdown continues, will it bring down the euro?

"I guess theoretically it could do if the worst case scenario comes to pass and European institutions don't do the necessary and reach some broad guidelines to allow some radical steps to be taken to recapitalize major financial institutions over here," Ken Wattret, chief euro zone economist at BNP Paribas, told CNBC.

But, given that the problems in the U.S. "are still every bit as big as here in Europe" and the way the Fed is tackling these problems raised some question marks about the credibility of monetary policy in the long run I think it is unlikely this is just a one-way bet against the euro," Wattret added.

Catastrophic scenarios such as the demise of the euro or the dismantling of the European Union should be taken with a grain of salt, analysts said.

"I'm 100 percent sure this will not break up the euro or the EU," Brzeski said. "I could imagine they would come out stronger and would learn something about coordination.

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