The current crisis is a heavy indictment of “market fundamentalism”. This crisis points the finger at major weaknesses of a model of economic and business governance, with its under-regulation and inadequate supervision, undersupply of public goods (including healthcare, infrastructure).as well as a blind belief in the self-healing/equilibrating virtues of markets).

Some are tempted to see the ongoing financial crisis as a recurrent accident, albeit more severe, along an economic cycle and following worldwide very cheap credit for years in a row. But a careful reading would go at its structural roots. Globalization of markets and financial engineering, with precarious and, frequently, missing regulations, highly skewed incentive schemes, and numerous conflicts of interest, have created the milieu for the current crisis.

Financial markets have become increasingly opaque and, identifying those who bear the risk together with evaluating it represent formidable tasks. The size of the so-called “shadow banking sector”, which is lightly, or not regulated at all, has been constantly increasing over the last couple of decades. Banks themselves have been in a game of “origination and distribution” of highly complex financial products; banks have engaged in more than questionable packaging and selling of debt tied to high risk mortgages. Inadequate incentive schemes, short-termism and blatant conflicts of interest have increased speculative, casino-type trading.

Dubious mortgage credits, based on the idea that an unlimited increase in housing prices would allow them to pay back their debts, are only the acute symptom of a much broader crisis, which relates to a type of financial governance, to a business model. The top three rating agencies in the world were themselves interested in investing in the securities they were rating, because of the high commissions they could get! And a major investment bank epitomizes a loss of any sense of ethics: it earned billions of USD by speculating downwards on subprime securities while selling them to its clients!

Ironically, financial innovation that was designed, purportedly, to diminish risk at the individual/micro level has ended up in exacerbating it at the macro level, thus enhancing systemic risk. In hindsight, episodes such as the LTCM or Enron falls, can be seen as stress tests for the financial system. It is quite surprising to hear officials (central bankers, supervisors, etc.) claiming that the magnitude of the current financial crisis could hardly have been imagined not long ago. Alexander Lamfalussy and the Committee of Wise Men, in a report on European securities markets (2001), underlined the trade-off between apparent higher efficiency and financial stability. Paul Krugman, in his ‘Return of Depression Economics” (1999) warned against the menaces posed by the expanding and hardly regulated shadow banking sector. In 2003 Warren Buffett called derivatives “financial weapons of mass destruction”. And a Bank of England report on financial stability, of April last year, by referring to the model of origination and distribution highlighted the catastrophic distance between lenders and the consequences of their decisions. Other down to earth voices rang the same bell!


The scope and nature of this financial crisis refutes glaringly those who have said that the financial industry is capable of self-regulation . There is a need to revise the regulatory frameworks for the operation of investment vehicles; hedge funds, all other investment vehicles, the shadow banking sector, in general, have to be regulated. The use of financial instruments (like CDOs) has to be regulated, so that the transparency of markets be restored and investors be adequately informed. As banks are required to hold minimum reserves a similar rule should apply to all financial institutions. Likewise, the magnitude of leveraging should be capped. Better regulation does not mean a reversal of financial openness; the opposite is true. Financial openness, in order to be sustainable (and not produce irreparable damage), demands proper (enforceable) regulations.

This financial crisis has made more visible the growing income inequalities which have accumulated in the past decades. There is no need to be a left-oriented democratic politician in order to decry such an evolution.

It is worthy to notice that rising income inequality in both the US and Europe has gone in tandem with an ever growing financial sector, that seems to have acquired a “raison d’etre” of its own. Since all regulation has practically been abolished in the financial area financial assets represent 15 times the total Gross Domestic Product (GDP) of all countries nowadays. The credits granted have reached unprecedented amounts; the accumulated debt of households, financial and non financial companies and of the American public local and regional authorities amounts to more than three times the US GDP, i.e. the double of what it was in 1929. The financial world has accumulated a massive amount of fictitious capital, with hardly an improvement for humanity and the environment owing to it, and it has generated increasing inequalities in favour of those with the power to issue this capital. The salaries of top CEOs, or at least those who have adopted a financial and not an industrial rationale, are between 300 and 900 times higher than the average salaries of those working for them, whereas in the first century and a half of capitalism up until the 1960s, that ratio was at most of 40 to 1. The share of direct and indirect wages in the GDP has been steadily decreasing in the last 25 years by 8% to 11% in the main industrialized countries. Between 1 and 5% of the richest part of the population has benefited almost exclusively from the increase of half of the GDP in 20 years. It is true that technological progress has contributed to rising income inequality (by favouring highly skilled labour); but misguided policies have had their major role, too, in this regard. All of this brings a huge ethical issue to prominence.

Many who talk about free markets seem to ignore that Adam Smith (seen as the father of laissez faire economics) wrote also “The Theory of Moral Sentiments”; and that Max Weber, the famous sociologist, connected hard work and moral values (ethics) with the advance of capitalism. Public policy has to deal with the social fallout of unlimited greed, lack of honesty, cynicism, selfishness, etc, which the current financial crisis illustrates conspicuously. Decent capitalism (that respects the dignity of man, to use Amartya Sen’s words) needs an effective public policy, aside from virtues to be found in individual beings’ pursuits of happiness and material rewards. Profit seeking is the essence of a market economy and without efficiency progress is unimaginable. But when everything, including one’s soul, is for sale, social cohesion melts and the system breaks down.

The current financial crisis casts a long shadow on and diminishes the West’s ability to have a more effective dialogue with the rest of the world in dealing with global issues, in managing side-effects of globalization –in a period when Asia’s extraordinary economic progress poses unprecedented new challenges.

If we want to be effective in our global endeavours, including dealing with the global warming, we need to pay genuine attention to the concerns of the rest of the world, whether in trade, development aid, etc . The spectacular rises in energy and food prices compound the effects of the financial turmoil and are ominous for what lies ahead, in the years to come. Quite tellingly, hedge funds have been involved in driving the prices of basic staples (ex: rice) upwards! Most severely affected are the citizens of the poor countries of this world. This means famine, destitution, a proliferation of failed states, more immigration.

But things are not rosy in the Union, too. Some EU officials are boasting about “robust European economies”, better financial supervision and regulation (than in the US). But is it quite so? Just consider the spreading pains in the real estate markets in the UK, Spain, Ireland; and more is, arguably, going to happen. Think also about economic nationalism and populism, which are both on the rise in Europe. Think about the social fabric of our societies. The implementation of the Lisbon Agenda must consider the implications of the current financial crisis and of the rises in the prices of basic commodities (energy and food). These implications will impact on domestic politics in the EU, on the whole metabolism of the Union.

EU policy-makers, at Union and national level, have to provide a firm response to the current financial crisis, which should be viewed from the wider perspective we have tried to sketch above. This implies an economic and business paradigm which should favour pragmatism and open-mindedness. The age of market fundamentalism has, arguably, come to an end!

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We believe it is in the highest interest of Europe to take adequate stock of these developments and try to identify the foreseeable consequences in the short and in the longer run as thoroughly as possible, so as to allow the Union to examine the appropriate measures and come up with the adequate proposals for the International Community to try to counter the effects and root causes of this crisis.

It is high time to set up a “European Crisis Committee” gathering high-profile politicians, former Heads of State and Government or Finance Ministers as well as renowned economists and financial experts of all continents. This Committee, if you agree to set it up and finance it, would have the following tasks:

- To make an in-depth analysis of the financial crisis, in the wider context we have tried to outline above.
- To describe and assess the economic and social risks entailed by the financial crisis to the real economy , particularly in Europe
- To suggest a series of measures to the Council of the European Union in order to avoid or limit these risks and to prevent future repetitions of even more severe financial crisis.
- To present to the Council of Ministers, the Member States of the UN Security Council, the Director-General of the IMF and all authorities and bodies concerned a set of proposals to limit the effects of this crisis and prepare a World Financial Conference in order to redraft the rules of international finance and the governance of global economic issues.

In 2000 we have agreed to make Europe the most competitive economy in world. This was reconfirmed in 2005. we must ensure that Europe’s competitiveness is supported and not undermined by the financial markets. We need to act now: in the name of our workers, for more investment and for economic growth, all in all, for more social justice.

Helmut Schmidt, Otto Graf Lambsdorff, Lionel Jospin, Jacques Delors, Michel Rocard, Romano Prodi, Jacques Santer, Göran Persson, Pär Nuder, Massimo d’Alema, Hans Eichel, Poul Nyrup Rasmussen, Daniel Dăianu, Paavo Lipponen, Ruairi Quinn,Laurent Fabius, Anneli Jaatteenmaki