The EU Starts to Get Its Act Together on Financial Reform
by Shane Fitzgerald
After months of tough negotiations between EU finance ministers, the European Commission and the Lisbon Treaty-empowered European Parliament, a long-awaited overhaul of European financial supervision now looks set to go ahead.
Under international pressure to implement reforms after Barack Obama signed into law the Dodd–Frank Wall Street Reform and Consumer Protection Act, a compromise was reached by finance ministers and MEPs last week to implement a version of plans first outlined in the de Larosiere report of 2009 (see these two IIEA reports for more detail). Ministers gave their formal approval of the plan yesterday, so all that remains is a final signing off by the European Parliament, which is due later this month.
MEPs today welcomed the supervision package that has been agreed while insisting that this is just the first step towards a new and comprehensive regulatory system. In contrast to many member states, who were keen to reserve as much authority as possible at the national level, MEPs were vocal in pushing for maximum autonomy for the new pan-European supervisory bodies. In fact, the deal represents a significant watering down of the original proposals, as the three new watchdogs (for banking, insurance, and securities) have few direct powers, except in “emergency situations”, which will be defined by member states in the Council, and not by the European Commission or Parliament.
Another outcome from yesterday’s ECOFIN summit was the pouring of cold water over the idea of a European financial transactions tax. This proposal, first floated in different permutations by Gordon Brown, Angela Merkel and Nicolas Sarkozy, was formally proposed by the European Commission to a cool reception at the last G20 summit. But it now looks to be dead in the water having failed to win over substantial support even within the EU. Other options, such as a system of levies on bank assets and activities, are still in play, but it is doubtful that meaningful coordination at the European or international level can now be achieved.
Despite these setbacks, finance ministers did agree to submit plans for their annual budgets to the European Commission and other EU governments for vetting (as part of a so-called ‘European Semester’). This idea first emerged from the Task Force on Economic Governance, chaired by European Council President Herman van Rompuy, but met with stiff resistance from certain member states who viewed it as an unacceptable infringement of national sovereignty. Agreement on this issue represents a significant concession to those who seek strengthened economic governance across the bloc as a response to the ongoing European sovereign debt crisis.
The EU Economic and Monetary Affairs Commissioner, Olli Rehn, called the agreement a major improvement in Europe’s governance architecture and promised to bring forward legislation in the coming weeks that would introduce “credible sanctions” to encourage countries to improve and coordinate their budgetary regimes. But it remains far from clear what these sanctions might entail.
Coupled with the unprecedented Greek bailout package and European Stabilisation Mechanism agreed earlier this year, these developments have Eurosceptics up in arms. In Britain, a new campaign calling for a referendum on EU membership has just been launched, referring explicitly to the bail-out mechanisms and the financial and budgetary supervision initiatives.
There is no doubt that at a time of unprecedented strain on the EU these initiatives are politically explosive. But failure to act decisively now will not just exacerbate the current situation and leave the EU exposed to financial crises in the future, but by undermining European credibility will scare away the confidence and investment that are so vital to economic recovery in the region.