Cover Story February 26, 2009, 5:00PM EST

How the Crisis Is Hitting Europe

(page 5 of 5)

says Michael Burda, a professor of economics at Humboldt University in Berlin. "It's a blessing the euro and the ECB are there."

Still, the crisis is forcing European leaders to rethink how they manage their economies. The European Union probably needs a single securities and bank regulator rather than the tangle of national bodies it currently has. There's talk of establishing a Europe-wide deposit insurance fund to prevent nervous Hungarians or Lithuanians from withdrawing their money from local banks and sending it to Germany. The European Commission could issue its own bonds backed by all members to help the likes of Spain, where borrowing costs have soared after a downgrade of the country's debt.

The Continent has some competitive advantages over the U.S. and could still emerge from the crisis more quickly. Thanks to decades of investment in nuclear, solar, and wind power as well as a history of energy conservation, Europe is less vulnerable to oil shocks than the U.S. Consumer debt is relatively low in most countries, helping to offset other risks to the banking system. And conservative lending practices mean that, outside of Britain and Ireland, European banks could recover their ability to lend more quickly than devastated U.S. institutions. Deutsche Bank Chief Executive Josef Ackermann argues that, by refusing state aid, he will have more freedom to operate internationally than weakened rivals subject to government intervention. "We can determine our own fate," Ackermann told reporters on Feb. 5.

Like the destiny of its companies, Europe's fate may depend on events outside its own borders. Germany and Eastern Europe won't recover until there is a revival in orders for cars and machinery from Russia, the Middle East, the U.S., and China. Britain and Ireland, with their huge banking sectors, must await a stabilization in worldwide financial markets. Just as the crisis began elsewhere, it may have to end elsewhere before Europe returns to health.

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Reeling in Iceland

Fishing has long been the backbone of Iceland's economy, an industry so important that the nation's coins bear images of cod, crabs, and lumpfish rather than kings or presidents. Fishermen now fear that Iceland's financial meltdown could lead to their worst nightmare: membership in the European Union, The Christian Science Monitor reports. Icelandic fishermen have resisted joining the EU because that would almost certainly mean ceding control of the country's rich fishing grounds to EU bureaucrats, whom they say have a poor conservation record. But with Iceland's currency, the króna, on the ropes, the country wants to adopt the euro, which would likely require EU membership.

To read the story, go to bx.businessweek.com/european-financial-crisis/

With Carol Matlack and Tiffany Stecker in Paris, Kerry Capell and Mark Scott in London, Jason Bush in Riga, and Bogdan Turek in Warsaw

Ewing is BusinessWeek's European regional editor.

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