This financial crisis is not the product of an accident. It was not impossible to foresee, as many of the world's top financial and political leaders today allege. The alarm had been sounded, years ago already, by clear-mined individuals. This crisis, in fact, incarnates the failure of little- or poorly-regulated markets and shows us once again that the markets are incapable of self-regulation. It also reminds us of the worrying inequalities of income that relentlessly continue to grow in our societies and throws serious doubts on our ability to engage in credible dialogue with developing nations concerning great global challenges.

    Financial markets have become more and more opaque and identifying those who bear and evaluate their risks has been revealed as a titanic challenge. The so-called "shadow" banking sector - barely or not-at-all regulated - has only grown during the last 20 years. The big banks have participated in a "creation and distribution" game of extremely complex financial products and embarked on the sale of debts - wrapped in rather questionable packaging - linked to high-risk real estate loans. Defective bonus systems, excessively short-term vision and obvious conflicts of interest have encouraged speculative transactions.

    Unsound mortgage loans wrongly based on the idea that real estate prices would continue to climb forever, thus allowing the debt contracted to be reimbursed, are only a symptom of a broader crisis in financial governance and commercial practices. The world's three top rating agencies rated these phony assets as relatively riskless. An investment bank earned billions of US dollars speculating on subprime securities' reduction in value, even as they were selling those securities to their clients, which more than eloquently summarizes the loss of any ethics in the business world!

    We were warned about the dangers of this situation. In a 2001 report on European securities markets, Alexander Lamfalussy and the Committee of Wise Men emphasized the connection between those markets' apparent increased efficiency and the price to be paid in financial stability. Paul Volker had already expressed his anxiety several years ago. Paul Krugman had also pointed out the threats posed by unregulated financial entities' growth over about a decade. In 2003, Warren Buffett charged derivatives with being "financial weapons of mass destruction."

    A Bank of England report on financial stability highlighted the dangerous gap between security holders and the consequences of their decisions. The problem resides in the present model of economic and company governance centered on minimal regulation and inadequate supervision.

    The financial crisis demonstrates all too clearly that the financial industry is incapable of self-governance. It is imperative to improve banks' supervision, control and regulatory framework. We must also revise the regulatory framework for financial investment instruments. The use of financial instruments (like CDOs, collateralized debt obligations, backed by various financial assets) must be regulated. All financial institutions ought, like banks, to maintain minimal reserves and their debt ratio may not remain unlimited. Finally, bonus systems must be revised to avoid encouraging incautious, imprudent and short-sighted risk-taking.

    With respect to this crisis' consequences for the real economy, it seems that the economic experts of the entire world have been struck by a bout of timidity. Almost all forecasting institutions have revised their growth expectations for 2008 and 2009 in developed countries downwards. But no one dares to say clearly whether or not Europe is threatened with economic recession. Yet, some symptoms are unmistakable. In the case of the European Union, a recession this year or next would have dramatic consequences.

    Growing income inequality has occurred in tandem with the continuous growth of the financial sector. It's true that technical progress has contributed significantly to the ever more significant differences in income that benefit highly trained personnel. Nonetheless, imprudent policies have also had a major impact in this domain. Financial capital currently represents 15 times the gross domestic product (GDP) of all countries. The cumulative debts of households, financial and non-financial companies, and American government at all levels represents over three times the United States's GDP, or twice the level recorded at the time of the 1929 stock market crash.

    The world of finance has accumulated a gigantic mass of fictitious capital that does very little to improve the human condition and the preservation of the environment. This financial crisis has allowed us to close a little better in on the alarming income disparities that have only grown over the course of the last few decades. The irony of the matter is that the salaries and bonuses of many CEOs have reached extremely high levels while their companies' profits stagnated or even dropped. The ethical issue is consequently key!

    Free markets cannot make a mockery of social morality. The father of economic laissez-faire, Adam Smith, also wrote the "Theory of Moral Sentiments," while Max Weber established the connections between hard work and moral values on the one hand and the advance of capitalism on the other. Decent capitalism (that is capitalism which respects human dignity, to re-echo Amartya Sen's remarks) requires effective government intervention. The pursuit of profit constitutes the essence of the market economy. But when everything is for sale, social cohesion disintegrates and the system collapses. The present financial crisis reduces the West's ability to begin a more constructive dialogue with the rest of the world about global challenges, management of the effects of globalization and planetary warming - even as Asia's economic boom poses unprecedented new challenges.

    The spectacular increases in energy and food prices are exacerbating the impact of the financial crisis and are a bad omen. It is very significant that speculative funds have contributed to the increase in basic commodity prices. The citizens of the poorest countries will be those most affected. We run the risk of finding ourselves facing unprecedented poverty, a proliferation of failed states, bigger immigration flows and more armed conflicts.

    Some proclaim loud and clear that Europe consists of "solid economies" with better financial control and regulation than in the United States. One could say that we started out that way. But let's not forget the growing problems in the real estate markets of the United Kingdom, Spain and Ireland, as well as the economic doldrums that are spreading throughout Europe. Let us also consider economic nationalism and populism, both which currently have the wind in their sails.

    European decision-makers, as much at the European as at the national level, must bring a firm response to bear on the present financial crisis. We need pragmatism, open mindedness, and cooperation in the pursuit of common objectives.

    Europe must study these developments and identify the foreseeable consequences in the short- and long-term in order to develop proposals addressed to the international community that will allow us to counter the effects and the deep causes of the present crisis.

    It is time to create a European crisis committee that will bring together high-level political representatives, former heads of state and of government, or former ministers of finance, as well as renowned economics and financial experts from all continents. This committee must be tasked with:

Performing a detailed analysis of the financial crisis in the broader context we've tried to describe above;

Identifying and evaluating the socio-economic risks that the financial crisis entails for the real economy, especially in Europe;

Proposing a series of measures to avoid or limit these risks to the EU Council;

Presenting a series of proposals to limit the effects of the crisis to the Council of Ministers, the United Nation's member states and Security Council, the director general of the IMF and all the authorities and governmental institutions involved and preparing a global financial conference in order to rethink the rules of international finance and governance involved in global economic matters.

    In 2000, we agreed to make the European Union the most competitive region in the world. We must guarantee that Europe's competitive standing be supported rather than undermined by financial markets. We must act without further delay: for our citizens, for increased investment, for economic growth, for social justice, for employment opportunities, and, in conclusion, for a better future for all Europeans.

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    Jacques Delors and Jacques Santer are former presidents of the European Commission.

    Daniel Daianu (Romania), Hans Eichel (Germany), Par Nuder (Sweden), Ruairi Quinn (Ireland), Otto Graf Lambsdorff (Germany) are all former economics and/or finance ministers.

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    Translation: Truthout French language editor Leslie Thatcher.