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A Check On Europe After U.S. Financial Meltdown

STEVE INSKEEP, host:

The move comes a day after British financial authorities also banned short-selling in financial stocks. Britain's stock market and its banking industry are feeling some of the same pain as Wall Street, and we have more this morning from NPR's Rob Gifford.

ROB GIFFORD: Here in Britain this week, the country's largest mortgage provider was taken over, shares have taken a battering, and out in the stores of north London, ordinary people certainly seem to be changing their shopping habits.

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Ms. LIZA ROSE (Resident, London, Great Britain): I tend to think a little bit more about what I should be buying, what I don't. Maybe going for cheaper brand of things as well, slightly cheaper brands. The general living bills have come up.

Mr. KARL THOMAS (Resident, London, Great Britain): Electricity, gas, water, tax, road tax, insurance, everything. So, I have to watch everything. I have to budget everything.

Mr. JOHN O'CONNELL (Resident, London, Great Britain): It's costing me more to live. Everything has gone up by about 25 to 30 percent. I've noticed that. I mean, basic stuff, I mean, I don't mean anything remotely resembling luxuries, you know.

GIFFORD: That's Liza Rose (ph), Karl Thomas (ph), and John O'Connell (ph), confirming that, in short, the boom has turned to bust in Britain as well. Across English Channel, though, in Germany, there's been some belt-tightening, but as is so often the way of the European Continent, less of a boom-and-bust cycle.

Mr. HELGA BAGA (Free University of Berlin): It is true that the continental European approach to banking are a bit more old-fashioned, and in this case, being old-fashioned makes for a somewhat smoother ride.

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GIFFORD: Helga Baga (ph) of the Free University in Berlin says the reason for the relative stability in Europe comes down to a different model of banking.

Mr. BAGA: The main difference is in the way banks finance themselves. In the American system, banks will - go to the capital market and get their money there. Also, firms will go directly to the capital market and get the money from the market. Now, in comparison, the typical continental European or German bank will be financing itself not on the market. It will draw its resources, its money, from households that bring their savings to the bank and get a certain interest rate for it. Now, that's - so, the deposits they use, then, to finance credit.

GIFFORD: And therefore, European banks, by and large, are less open to the wild volatility of the markets that we've seen in New York in the last week. While some European banks like UBS have been burned by buying up bad mortgage bank securities from American banks, in Europe in general, the bank that gives out the mortgage monitors the risk. Old-fashioned, but, well, rather effective. Not everyone agrees, though, that the transatlantic differences are due to the different models, Anglo-Saxon boom-and-bust versus continental slow-and-steady. Charles Wyplosz, professor of economics at the Graduate Institute in Geneva, says it all comes down to who banks are willing to give mortgages to.

Dr. CHARLES WYPLOSZ (Director, International Centre of Money and Banking Studies, Graduate Institute of International Studies): Well, we have boom-and-bust, mind you, in a number of countries who, for exactly the same reasons as the U.S. - Spain is going through a boom-and-bust because they also had a housing-market explosion. Same in Ireland. What we didn't have is the sub-prime phenomenon, mortgages given to people who are likely not to pay back.

GIFFORD: As a result of the events on Wall Street this week, there has, of course, been in Europe a certain amount of that very German concept, schadenfreude, the joy of seeing others' misfortunes. Most economies here warn against it. The European model is open to swings and problems, they say, while at the same time agreeing that, yes, the age of American investment bank as master of the universe may well be over. Rob Gifford, NPR News, London. Transcript provided by NPR, Copyright NPR.

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