European policymakers are enacting a ban on naked short selling beginning August 12th.  Although completely legitimate the new regulation is one of complete desperation as fears continue to swirl of a European debt crisis contagion affecting the whole Union.

Enacted by France, Italy, Spain and Belgium, the plan to ban naked short selling on the regional stock markets won’t work – and will likely set the markets up for further losses down the road.

For one, history tells us that implementing such a measure usually doesn’t change the longer term direction of the stock market.  Several notable and industrial countries have implemented actions, only to find the end results to be worse off.  One such economy was the United States.

Back in 2008, at the height of the US financial crisis, government regulators implemented a ban on short selling, thinking that these actions would help to support the markets.  It didn’t.  The market sell off continued – as the S&P 500 fell another 20% following the ban.  Similar losses were seen in the currency market as traders exited out of the EURUSD.  Although the ban helped to curb some selling in the short term – across the markets – it didn’t help much in the longer term.  Shortly after the ban, the EURUSD exchange rate gained by 6.4% before dropping another 15% during the next month.

But, the new ban policy also falls short on conviction.

Similar to multilateral currency interventions, a unified stance against equity short selling would have provided a far more convincing story.  Instead, Europe will now have just four nations implementing the ban with major bourses in both the UK and Germany denying the need for such a measure.  Once again disparities between European leaders and their counterparts are increasing the likelihood that nothing great will come out of the new policy.

So, even though European leaders are attempting to quell the situation – providing some order to the markets – they are just adding to the speculative fire.  At this point, the new plan does nothing but inject more concern into volatile markets.  This may mean further losses for the EUR in the coming weeks – and record levels in CHF and JPY against the US dollar.