Psychological Effect

Don't worry, you're money is perfectly safe. That's the message German politicians gave private depositors. The government guaranteed savings in German accounts. According to the finance ministry, the federal government is vouching for "more than 1 trillion euros."

But even such a guarantee wouldn't be worth a cent if everyone ran to the bank for their money -- not even the government could pay such a huge sum of money. The core of the guarantee serves a psychological purpose: despite all the talk about the financial crisis' dimensions, citizens shouldn't get any more worried than they already are. By giving a guarantee, the state is hoping to avoid a situation where it would have to pay anything back.

But there's a different problem: No German bank has yet faced difficulties in this crisis due to private customers wanting their money back. Even at Britain's Northern Rock, customers didn't start demanding their money back until the bank was already deep in the crisis.

There are two reasons for the difficulties banks are facing. Either they have too many financial products based on junk US mortgages that needed to be written off on their books or they haven't been successful in receiving short-term capital from money markets to keep up with running commitments because skeptical banks are hardly lending to each other.

The state's guarantee for private savings does not solve either of these problems. It is a preventative relaxant for the possibility that additional institutions take a tumble. To deal with the actual problem, politicians are now talking about a "national protective umbrella."

There is a possibility that individual governments will put together bail-out packages which, like the United States, buy rotten debts from banks. Politicians in at an emergency summit in Paris couldn't agree non a billion-euro package for a European solution, and by the end of the meeting the leaders denied even having the idea of creating one. They did, however, agree to coordinate their actions better in the future, though it will still be up to each country to decide on the best way to protect its banks.

But the example of state guarantees for private deposits shows that there won't be any national answers to this financial crisis.

Chancellor Angela Merkel criticized the Irish government for guaranteeing private deposits, and then, a few days later, does the same thing. The more countries offer such guarantees, the greater the pressure will be on the remaining governments to do the same. Otherwise their banks will risk losing customers -- and capital -- to other European countries. The end result will be a European solution -- even if it's not one member states agreed to after a set of negotiations. Officially, financial policy is left up to national governments, but the reality has long been a different story.

The same is true for "national protective umbrellas" and other safeguards. When a country buys its banks bad debts in a big way, other countries are forced to act in the same way. As Europe's biggest economy, Germany has a special role in this regard.

Andreas Becker reports for Deutsche Welle's business desk (sms)