Archive for February, 2009

Larosière report to bring comfort to the Commission?

Thursday, February 26th, 2009

In the next few days the European Commission will tell us how Europe’s regulatory regime for financial services should be reformed in the aftermath of the credit crisis. As a starting point the Commission has the report from Jacques de Larosière’s taskforce, which was commissioned by President Barroso last October and published earlier this week.

No doubt this report will give comfort to the Commission, for it spells evolution not revolution, recognises the limited competence of EU institutions in financial supervision and does not seek to impose new pan-European powers for regulating the sector. It will be a useful antidote against those (including governments) who want a much more aggressive approach to financial services regulation.

Alan Greenspan recently admitted that as chairman of the Fed his basic assumption was that the self interest of banks and bankers ensured that they would never do anything which ran counter to their own long-term commercial advantage. This assumption was key to Greenspan’s light-handed approach to regulation, as it was for most governments and regulators across the globe.

How wrong they were! The general assumption these days seems to be quite the opposite. That’s hardly surprising, given the fine mess which financial engineering has got us into. Both the regulators and the practitioners failed because each depended on the other.

Just take the example of the individual misjudgements revealed in the $50bn collapse of the Madoff funds. Investment firms trusted the regulators to guarantee compliance, while the regulators trusted the investors to do their due diligence. (How Charles Dickens would have jumped at the chance to create a Mr Madoff as one of his characters!).

Everyone is now seeking a new model for financial supervision and regulation. President Obama is pressing Congress to approve a tougher regulatory framework to protect consumers and investors; the April G-20 meeting in London will discuss a stricter global regulatory regime; and Europe is wrestling with the perennial question: should financial regulation be managed nationally or at the European level?

Lamfalussy and the Financial Services Action Plan sought to close this argument, constructing a sharing of the burden between EU legislation and national implementation. Jacques de Larosière’s taskforce goes down a similar road. It rejects the idea of a pan-European regulator, but would create a European Systemic Risk Council (ESRC) chaired by the ECB president and consisting of the ECB general council, one Commissioner and the chairs of each pan-EU committee on banking, insurance and investment services.

The ESRC’s fundamental task would be “macro-prudential supervision” – essentially to keep an eye on the big picture (but not the regulation of individual firms) and to warn of troubles ahead. It might bring the ECB closer to the heart of economic policy making, with enhanced influence, but no teeth as far as I can see.

At the level of individual firm supervision, a European System of Financial Supervisors (ESFS) would give a stronger European dimension to the activities of national regulators, although it would still be the competent authorities of member states which retained the power to act, subject to the FSAP legislation. There is an interesting contrast with European competition policy, where the anti-trust powers of the Commission provide the backing to ensure coherence between national authorities in the European Competition Network.

De Larosière’s report is no root-and-branch reform. It advocates greater co-ordination and co-operation but no real transfer of power. It recommends that supervision should be extended to those currently unsupervised financial institutions with “potential systemic risk” such as some hedge funds, more clarity for dealing with cross-border banking failure (the Fortis case), greater national supervision of credit agencies and a big commitment to the IMF for dealing with the global context.

In his introduction to the report De Larosière sets out the choice:  “chacun pour soi” beggar-thy-neighbour solutions; or the second – enhanced, pragmatic, sensible European co-operation for the benefit of all to preserve an open world economy” . Barroso described the report as “balanced and rich” which I guess makes it a good trailer for the Commission’s forthcoming proposals.

Posted in Competition, Eurozone, Finance | No Comments »

Economic crisis exacerbates tensions

Tuesday, February 17th, 2009

The economic crisis is exacerbating tensions across the EU. President Sarkozy has done his bit, stating on television that while French manufacturers can make cars in India which are for sale to Indians, they should not make cars in the Czech Republic which would then be sold in France.  He apparently called for the repatriation of car manufacture to French soil.

Sarkozy’s remarks could not have come at a worse time for the Czechs. The last thing you want when unemployment is rising and your currency is under pressure is any threat to the new investments which are so vital for your economy. Nor is it helpful when your country still has to ratify the Lisbon Treaty and you depend on a sceptical parliament to vote it through.

An angry Czech prime minister Mirek Topolanek warned of the spectre of protectionism, which could prolong and intensify the downturn. On February 9 he announced plans for a European Council to discuss protectionism, while on the very same day Sarkozy and Chancellor Merkel issued a joint (rival) statement calling for an informal European Council “to prepare the spring summit”.

It has now been agreed that everyone will lunch together in Brussels on March 1. Will protectionism be mentioned at all, I wonder.

Protectionism can take many forms. Who can resist a headline?  “British jobs for British workers” said Gordon Brown at the 2007 Labour Party conference, only to see his rallying call spelled out on strikers’ placards earlier this month as British workers complained that Italians and Portuguese were carrying out a contract at a British oil refinery (owned by Total). Right-wing parties made hay of it and we will no doubt see the slogan again during the European election campaign although not, I imagine, in the hands of Labour candidates.

The president of Italy’s Cofindustria expressed her dismay at the phrase, complaining of “protectionist tendencies and raw nationalistic instincts” in an article in the Financial Times.

The French bail-out plans for the car industry have put the European Commission on the spot. Competition Commissioner Neelie Kroes was quick to condemn Sarkozy’s original remarks. When the plan itself was unveiled, the Commission asked for further details to ascertain whether state aid conditions were being met. Commission president Barroso was rather defensive of the French, saying that if regional aid was proposed it would clearly relate to investment within France.

There is another interested party to this debate on protectionism: the United States. The €800bn emergency bill which was passing through Congress contained some significant “Buy American” clauses for public contracts, with particular relation to steel. It seems that President Obama was quick to amend this to say that any such moves must be compatible with international trade obligations, but you can be sure that the small print of the 1,000 page document will be rigorously scrutinised by trade officials across the globe.

As the April G20 meeting comes closer, where the role of international institutions such as WTO, IMF and World Bank will be discussed, everyone will be scrutinising everyone else’s actions for any moves towards the erection of trade barriers in the face of the worldwide recession.  European solidarity has rarely been more essential.

Posted in Elections, European politics, Eurozone, Trade, Treaty of Lisbon, UK politics | No Comments »

Can Europe provide leadership in Copenhagen?

Monday, February 9th, 2009

It’s maybe hard to think of global warming as we shiver in the coldest European winter for two decades, but there are just nine months to go before COP15,  the UN conference on climate change in Copenhagen, which may well determine whether or not the world can respond to a threat to our planet which scientists are convinced will lead to catastrophic change unless we act fast.  So can Europe provide the leadership in Copenhagen?

The European Parliament last week issued the findings of its Temporary Committee on Climate Change.  MEPs are convinced that climate change is more rapid and more serious in its adverse effects than previously thought and set out a checklist of measures which they believe must be implemented, much along the lines of the Commission’s proposals.

Competition is hotting up for global leadership of the issue. The transformation in US policy was expounded in a recent speech by President Obama where he outlined the programme of his administration – and his conviction that the US should be the leader of   “a truly global coalition”. Europe, while rejoicing over the US conversion, would no doubt prefer joint leadership.

No issue could be more global than climate change and here lies the biggest challenge for the EU, the US and the rest of the developed world: how to secure the commitment of China, India and other advanced developing countries to transform their own energy policies at a time when the stability of their societies depends so heavily on unimpeded economic growth. There is no hope of getting these countries on board if the developed world does not move first, yet there is no guarantee that they will be willing to participate. A failure to engage them while their economies are expanding will render all the efforts of the old economies of little value.

Balancing the emissions from dozens of new coal-fired power stations in China alone will require quite a combination of cash subsidy coupled with political and economic conviction.

Hence the Commission’s latest communication, which puts great emphasis on the need for “an effective financial architecture” which would include payment of €90billion a year for developing countries by 2020.

Europe is proud of its political leadership up until now in the delivery of climate change policies, but perhaps the real challenge will be to industrial leadership. I wonder if the commitments which are being made by the new US administration to support new clean technologies will be the contemporary equivalent of the Star Wars project of a former US president. It is no accident that the huge infusion of research and development funding to the US defence industry helped to build a level of capability which has left everyone else as spectators.

Could the same thing happen with the new technologies to confront climate change? It seems quite likely, which means that Europe must build on its own research programmes. Its motor industry, aerospace, renewable energy technologies and energy efficiency models are all potential winners in world markets, but may face competing programmes of support from across the Atlantic and indeed from the rapidly evolving economies of South East Asia.

Posted in Climate change, Energy, Environment | No Comments »