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Tough home truths in IMF report

Tuesday, June 8th, 2010

It was evident from the beginning of the eurozone crisis that the only way to discipline recalcitrant member states in the face of enormous budget deficits was to involve the International Monetary Fund, an independent, external organization which was definitely not part of the family, a body which could lay down tough conditions for winning its support, and could pull the rug out if necessary.

So it was little surprise to see the forthright tone of the IMF team when they left Luxembourg on June 7, having completed their analysis of the situation. Their report makes quite a contrast to the gentle reassurances of the eurozone ministers at their meeting on the same day.

The IMF report doesn’t mince its words. It may be familiar language for failing economies in Latin America, but for the eurozone! Take a few phrases: “Policies need to move urgently from crisis management to fundamental reforms”, “strengthen economic governance of EMU” “longstanding problem of anaemic growth in the euro area must now be addressed”, “the euro area fiscal framework needs to be substantially strengthened”, “more ambitious changes are needed”. And so on, with detail. The fundamental theme is that European countries must transform their economies, slash government spending and drive for economic growth.

The eurozone ministers did formally launch the €440bn European Financial Stability Facility at their June 7 meeting, but that’s definitely “crisis management”. The EFSF has been established as a limited company under Luxembourg law and will work in conjunction with the IMF to guarantee support for eurozone members if their credit position should weaken.

The question still remains as to what the eurozone can do to strengthen its effectiveness and meet at least some of those IMF demands. An intriguing game of smoke and mirrors has been played since the Special Purpose Vehicle and the associated IMF support were announced on May 9, a game designed to convince the markets that Europe is getting a grip of its profound economic crisis. The reality is that everyone has a different idea of what needs to be done and what can be done in the longer term.

Economic government for the eurozone. That’s the catch phrase. President Van Rompuy has used it, French Economy Minister Christine Lagarde has used it and Chancellor Angela Merkel has almost used it – “economic governance” is the closest she has come (also a phrase used by the IMF). President Sarkozy has spoken of a Eurozone Council. But a closer look at how it would work reveals something like a beefed-up version of what already exists.

The argument that a European single currency can only survive if there exists a common economic policy, common fiscal policy and common budget policy may prove to be correct in the long run, but it is clear that this is not what Europe’s present leaders mean when they talk of economic government.

France wants a formal decision-making structure where heads of state and government agree on fiscal discipline and maybe impose sanctions on recalcitrant member countries. Germany in effect argues for a stronger commitment to the stability and growth pact (and has announced budget cuts of €30bn over the next four years to do its part). Luxembourg Prime Minister Jean-Claude Juncker, president of the eurozone group of countries, believes that eurozone governments should vet each other’s budget plans. But nobody contemplates the transfer of fundamental tools of economic management to a supranational European policy-maker. Maybe the IMF is a different matter?

So what of the euro crisis? At least the decline of the euro is seen as a positive, making European goods more competitive and – perhaps – boosting domestic demand within the crucial German economy. What is also evident is an increased determination to cut government spending sooner rather than later, reflected in the G-20 meeting. And of course these are not challenges faced only by the eurozone; the UK’s new coalition government has a massive challenge ahead in reducing spending and boosting growth. A poisoned chalice indeed!

Posted in European politics, Eurozone, Finance | No Comments »

Concerted action replaces platitudes and empty promises

Monday, May 10th, 2010

The markets have been bowled over by the scale of the eurozone bail-out package announced this morning, after agreement by G-7 finance ministers, the ECB, the European Commission, the 16 eurozone governments and the International Monetary Fund. An emergency funding facility of up to €720 billion is designed to protect weaker eurozone members and save the integrity of the euro. At last the swathe of platitudes, reassurances and empty promises which have characterised the year to date has been replaced by concerted action.

The package is a dramatic reminder of the inter-relationships between global economies. Last week we seemed on the brink of a new Lehman-style banking crisis, this time created in the land of the euro but spreading across the world. Inter-bank lending threatened to dry up at the prospect of Greece defaulting, with banks across Europe and beyond hit by the consequent loss of confidence – especially those with substantial holdings of Greek bonds.

The ECB, the IMF, the US Federal Reserve and other central banks are all implicated in the measures to improve liquidity.

The IMF has now become a full partner in the support mechanisms for the eurozone – not a partner much welcomed by those purists who wanted to keep eurozone troubles within the family, but a better agent for enforcing disciplines than the European Commission or the Council of Ministers could ever be. The Fund will provide up to €220 billion of the new facility – one-third of the total, as in the deal to support Greece.

The fact that a possible contender for the French presidency now heads the IMF adds an extra frisson of interest. Dominique Strauss-Kahn and Nicolas Sarkozy are not the best of friends.

For Chancellor Merkel it was a particularly tough weekend. She had hoped to delay any commitments at least until after the elections in North Rhine Westphalia, but the scale and urgency of the crisis and the impact of a Greek default on many German banks made immediate action vital. NRW took its revenge, voting out the CDU – FDP coalition.

As usual it’s the “speculators” who are fingered as the guilty parties for driving down the euro and threatening contagion for Spain, Portugal and others. It’s an easy cop-out to shift the blame for political and economic failure to the malign forces of what former British prime minister Harold Wilson called “the gnomes of Zurich” when the pound was forced to devalue in the 1960s. T’was ever thus.

The waves from the eurozone storm hit Britain’s shores with some force. It was not the prospect of a hung parliament which drove down the London stock market last week, but fears that the Greek crisis would shatter the UK’s recovery prospects. As soon as the stability package was announced this morning, London share prices shot up by three per cent.

The prospect of a coalition government for Britain grows by the hour. It would be the first real coalition since Churchill’s wartime government was dissolved in 1945, but a likely outcome given the Conservatives’ failure to win an outright majority. The Conservatives took 306 seats in Parliament, 20 short of a clear majority, with Labour at 258 and the Liberals at 57.

On May 8 the Conservatives’ David Cameron formally invited the Liberal Democrats to join him in government. It may prove to be a watershed of historic proportions. That is if the Lib Dems dare to take the plunge and if there is enough flexibility on the Conservative side. Talks between Cameron and the Lib Dems’ Nick Clegg have been under way all weekend. Early indications are that agreement would concentrate on measures to tackle the massive UK budget deficit, but would include enough common policies to create a coalition fit for at least two years of stable government. The future of the voting system may be the most intractable issue.

For Nick Clegg, leader of the Lib Dems, the outcome of the British general election was the stuff of dreams, even if it began with disappointment at losing parliamentary seats when all the opinion polls suggested a surge in support. At least Clegg can take the credit for changing the game, for stimulating interest and boosting turnout. The cynicism which many of us thought would sour the elections and cut participation was swept away in a much more positive electoral picture.

Britain’s EU policy seems unlikely to be a major problem in formation of a Conservative – Lib Dem coalition. Although the rhetoric on Europe is different the practical obstacles seem to me to be minimal. Certainly Clegg could not hope to take the foreign affairs job in a coalition government, but no major EU decisions are imminent to upset any partnership. The failure of the UK Independence Party to secure more than 4 per cent of the national vote has probably justified Cameron’s euro-sceptic tone. It may well have seen off europhobia as a major force in British politics.

Posted in Elections, European politics, Eurozone, Finance, UK politics | No Comments »

Ten year strategy must be blueprint for change

Sunday, January 10th, 2010

In his first major initiative since taking up his new role on January 1 2010, European Council president Herman Van Rompuy has convened a summit for February 11 to prepare for the 2020 Strategy, a ten year programme for creating a more competitive Europe. But can these plans really achieve anything? Only if they lay the groundwork for far-reaching change and adaptation.

It was of course the 2000 Lisbon Agenda which set out the first Ten Year Plan for the economic regeneration of the European Union. Who can forget the famous hostage to fortune, that Europe should become the world’s most competitive and dynamic knowledge-based economy by 2010?

The Lisbon Agenda was a creature of its time. The millennium dot-com boom was still booming, the digital revolution was expected to transform society. There was much talk of a new paradigm. Just as soaring stock markets ignored traditional industries in favour of the new, so the Lisbon Agenda envisaged old industries giving way to a new economy of high-tech research-based business creating employment and opening unbounded opportunities for the people.

It was not to be. The collapse of the dot-com dream was a disastrous start for Lisbon. The anticipated growth in output and jobs from the “new economy” proved an illusion. The industries which were expected to deliver a new world foundered in mountains of debt and disillusionment. No surprise then that all those early hopes were dashed.

Yet by the start of 2008 Europe’s economy had picked up. Enlargement had given a great boost and there were signs that governments were bringing more flexibility to their economies, for instance on tax policy and entrepreneurship, where the Lisbon process encouraged many member states to facilitate the creation and expansion of small firms.

Employment participation had gone up from 62.2 per cent of the potential workforce to 65.9 per cent, not yet to the 70 per cent Lisbon target, but certainly an improvement. The growth rate was improving, at 3.2 per cent in 2006 and 2.9 per cent in 2007 – compared with the 3 per cent Lisbon aim.

EU policy-making had made progress too, opening up sectors like telecoms and financial services. The new technologies had become deeply entrenched in traditional industries.

Then came the banking crisis. Collapsing output and rising unemployment have been the consequence and it is clear that the Lisbon targets have been hopelessly missed. Growth slumped to 0.8 per cent in 2008. Economic prospects for 2010 and 2011 look pretty gloomy.

So can Ten Year Plans really achieve anything? I see that Spanish prime minister José Luis Rodriguez Zapatero believes the Lisbon Agenda to be too soft. He wants the adoption of new policies which are binding on the member states, with power for the European Commission to penalise countries which fail to apply them.

This is tough talk, which would be linked with a formalised European economic policy, maybe beginning within the Euro Group. President Sarkozy is a keen supporter of this approach. Angela Merkel is definitely not. It contrasts with the soft policy philosophy of Lisbon which relied on peer pressure, search for best practice and an emphasis on opening up markets and stimulating research.

There is no doubting the challenge which Europe faces as it emerges from the recession. It strikes me that the biggest priority for a 2020 Strategy is to spell out the need for change and identify the hard choices for achieving it. Wealth creation must be the absolute priority. Europe’s industries face huge competitive pressures from countries like China and India at the same time that public spending faces increasing demands from an ageing population. It won’t be easy to find common ground. A good test for Mr Van Rompuy indeed!

Posted in Competition, Digital, European politics, Eurozone, Finance, Telecoms | No Comments »

Shock: British journalist praises Barnier

Tuesday, December 8th, 2009

At last a touch of balance in Britain’s Daily Telegraph over the nomination of Michel Barnier to the internal market portfolio, with responsibility for financial services! I guess it’s no coincidence that the writer, eurosceptic Ambrose Evans-Pritchard, was the newspaper’s correspondent in Brussels from 1999 until 2004 – the same time span as Barnier’s former term as commissioner. No doubt he has personal experience of the Frenchman’s qualities.

I mention this in the context of the furore over recent months concerning EU appointments, linked in the UK with the debate over financial services regulatory reform and the perceived threats to the City of London. Maybe the frenetic atmosphere is beginning to disperse.

It certainly didn’t help when President Sarkozy told Le Monde that the English were “the big losers in this business”, although the wave of aggression whipped up in sections of the British press over Van Rompuy, Ashton and the Commission nominees was quite a provocation, to say nothing of prime minister Brown’s own trumpeting of the Ashton appointment as a national victory in response to Conservative criticism.

It’s just as well that Sarkozy’s plan for a reassuring joint visit to London with Barnier was knocked on the head. It really would have looked like a French conspiracy.

Barnier has been calming things down. His job, he says, is to strengthen Europe’s financial centres, including London. The fears which had been expressed in the City of London were “very exaggerated”.

There has however been a shift in the political mood which is reflected in the composition of the new Commission. The three key economic portfolios – internal market, competition and industry – go to the Club Med with commissioners from France, Spain and Italy. Free markets, raw in tooth and claw, will not be the flavour of the next five years. The drive is clearly for more regulation, especially in financial services, regulation which has to operate at a European level. That’s no surprise, given that the near-collapse of the global banking system did have Anglo-Saxon origins.

An economic double-dip with more lost jobs would put further pressure on EU policy-makers. The challenge for the Barroso II Commission is to maintain progress in the single market, to stimulate business activity, so helping drag Europe out of recession, and to continue the liberalisation of sectors like energy and telecoms. The nominated energy commissioner, Günter Oettinger, may have the most challenging role, given the problems which German firms have with the gas and electricity packages. Neelie Kroes, on the other hand, should be in her element with the “digital agenda”.

As for financial services, the Council of Ministers and the Parliament are of course working on proposals for financial regulation which also date from the outgoing Commission – the legacy of Charlie McCreevy. These include the establishment of the European Systemic Risk Board managed by the ECB and the three European supervisory bodies for banking, insurance and investment services.

There is some progress on these dossiers. It seems that ministers last week agreed that the powers of the three supervisory bodies will be circumscribed, allowing appeal to the Council by a member state which believes its sovereignty is being infringed. MEPs have yet to discuss these proposals.

Meanwhile the treatment of hedge funds and private equity remains a highly contentious issue which may run well into next year – perhaps beyond a British general election, which some rumours suggest could be in March 2010.

Posted in Digital, Elections, Energy, European politics, Finance, Treaty of Lisbon, UK politics | No Comments »

Iceland’s path to EU membership may be a rocky one

Monday, July 27th, 2009

I see that the EU Council of Ministers has asked the European Commission to deliver an opinion on Iceland’s application to join the EU, just 10 days after Reykjavik submitted its formal request for membership. The Swedish presidency wants the report by the end of the year, and foreign minister Carl Bildt has implied that Iceland’s status as an EEA country could speed the process of the application, in contrast to the slow progress for the Balkan applicants.

The Icelanders no doubt remain shell-shocked by the collapse of their banking system and the consequent halving in the value of the krona, and crave the stability of the eurozone, but it strikes me that the path to membership may be far from smooth. At the end of the process – say in 2011 – lurks a referendum: by then the mood of the country may have changed.

Fisheries could be a major stumbling block. Seafood accounts for almost half of Iceland’s exports and 10 per cent of its gross domestic product, which is quite something when another chunk of the country’s economy – the banking system – has disintegrated. The cod wars of the 1970s, when Iceland extended its territorial limits to 200 miles and the Royal Navy sent frigates to protect British fishing vessels, showed the depth of national feeling on this issue.

Even now international relations on fisheries policy remain poor. I gather for instance that Iceland has been excluded from negotiations on the management of mackerel stocks in the North Atlantic and has therefore opted out of catch allocations. The country is very concerned to rebuild cod stocks, which is a key economic asset. Stocks may be recovering but there will be intense opposition to surrendering quota to EU fishermen under the common fisheries policy. Just to add to the sensitivities, Iceland still has a whaling industry.

At least the review of the EU common fisheries policy is timely, with signs that ministers have accepted the need for fundamental change (just as well, as many fish stocks in European waters are on the point of collapse – and see Sarkozy’s change of heart). However, the fisheries chapter in the Commission’s Iceland report will be one of the most difficult to compose. Could it be the catalyst for the creation of a new fisheries policy, or will it hark back to the disastrous EU policy which has been pursued since 1973?

Becoming part of the eurozone is the big driver for Iceland, but there could be difficult issues here as well, given the level of Iceland’s public debt (about 100 per cent of gdp). For Iceland to qualify for eurozone membership could be an even greater challenge than is faced by the Baltic states and Hungary.

The vote in the Althing to apply for membership was a close run thing – 33 in favour, 28 against – and it would certainly be wrong to underestimate the negotiating difficulties which lie ahead. If the Irish vote “no” on Lisbon then the prospects for any enlargement would be gloomier still.

Meanwhile Britain’s Conservative shadow foreign secretary William Hague continues to inveigh against Lisbon. But whatever you think of his views, he is a consummate speaker. You may like to savour his recent performance in the House of Commons on the possibility of Tony Blair becoming president of the European Council under a ratified Lisbon Treaty. No wonder Gordon Brown needs a holiday!

Posted in Agriculture, Enlargement, Eurozone, Fisheries, Treaty of Lisbon, UK politics | No Comments »

Barroso on the spot before European Council nomination

Monday, June 15th, 2009

People have been grumbling over the last year or so that Barroso’s presidency of the European Commission has been too much influenced by hope of a second term, and that he has leant over backwards not to upset the big member states. I’m not convinced of the evidence for that, but the Commission president has certainly been put on the spot now.

The European Council is expected to give its provisional endorsement for Barroso’s reappointment later this week, but President Sarkozy has threatened that this decision is conditional on the candidate’s good behaviour. Indeed, the French president says that the appointment might need further confirmation after the coming into force of the Lisbon Treaty, when ratification in the European Parliament would require a majority of members and not just a simple majority of those voting.

When Sarkozy and Chancellor Angela Merkel gave their conditional approval to Barroso on June 11 they were speaking from a position of strength following their strong showing in the European Parliament elections, in dramatic contrast to British prime minister Gordon Brown who could hardly be weaker and whose party suffered a bitter defeat in the polls.

So what does Sarkozy want? Tighter regulation of financial markets for one thing, with stricter regulation, for instance of hedge funds, derivatives markets and rating agencies. He wants policies which at least purport to show that the era of Anglo-Saxon dominance of these markets, which many perceive as the root cause of the recession, has been weakened for good.

Commission proposals based on the Larosière Report may not go far enough for Sarkozy, although the Brits are fiercely opposed to giving responsibility to the European Central Bank for the European Systemic Risk Council, while firms in the City of London run an intense campaign claiming that new rules will impose unacceptable constraints on their business and force them to move outside the EU.

The broader concern of the French president will relate to the nominations and portfolios of commissioners. The internal market job, including financial services, is a key one. Competition policy is another. Neither Charlie McCreevy nor Neelie Kroes are favourites of Sarkozy. Barroso will have to tread carefully in selecting candidates for a new college.

The approach of the newly elected European Parliament raises other doubts. Will MEPs choose to await ratification of Lisbon before endorsing anyone as Commission president? Will Barroso achieve the simple majority he needs if there’s a July vote? And where will the Conservatives stand with their 25 GB plus two Ulster seats? If they don’t vote for Barroso, for whom will they vote?
The Conservative position could be especially crucial in the debates over the new financial services legislation, when the Commission’s new proposals come to the Parliament during the forthcoming autumn and through 2010.

As a group outside the EPP the Conservatives are likely to forfeit any influence they might have had in shaping policy towards light touch regulation – an influence which was extremely strong in the previous Parliament. There will no doubt be those within the EPP who will be inclined towards tougher regulation. Without the presence of the Conservatives their views may well prevail, carrying the group with them. It would certainly be a strange irony if the defection of the Conservatives from the EPP played directly into the hands of the French President!

Posted in Better regulation, Competition, Elections, European politics, Eurozone, Finance, Treaty of Lisbon, UK politics | No Comments »

Trichet adopts a measured pace

Monday, April 20th, 2009

Don’t pile up new decisions, but execute what has already been decided. That’s the basic approach of ECB President Trichet as expressed in Sunday’s interviews with Japanese newspapers. He thinks the policy-makers have done what it takes to restore global growth, but, he warns, it won’t happen until 2010.

Some commentators had complained that the ECB did not cut enough when it reduced interest rates by a quarter per cent early this month to 1.25, but Trichet is keen to keep his powder dry. He talks of a measured pace. Another quarter per cent is possible in May, together with other “non-conventional measures”.

So what measures are they? Money markets are apparently waiting with bated breath to see whether the European Central Bank resorts to buying up corporate debt and government bonds to release more liquidity on to European markets.

This process of so-called quantitative easing, already introduced by the Bank of England and the Fed, could have some sensitive political overtones for the ECB. Where should they target the action? Do they buy up Portuguese, Irish, Greek and Spanish bonds to help the weakest national markets, or concentrate on the biggest economies such as Germany which act as drivers for the EU as a whole? Or maybe they can buy up bonds issued by the European institutions like the EIB.

These quandaries nicely illustrate the complexities of the eurozone, where measures necessary to support the general eurozone interest could benefit one member country more than others.

Trichet has argued that ECB action to boost liquidity has already had an impact, reducing euro interest rates below those of the dollar and relaxing constraints on borrowing. He is not in favour of more dramatic action.

It seems that we are now moving into a new phase of this crisis, where governments must struggle to fight the fires of recession, the social unrest and political turbulence which come with rising job losses and soaring budget deficits, but can really do little more than hold on while world trade picks up again (desperately important for Germany, for instance) and confidence returns.

Posted in Eurozone, Finance | No Comments »

Europe can be pleased with G-20 outcome

Friday, April 3rd, 2009

Let’s accentuate the positive! The G-20 meeting in London did achieve a much wider consensus and more far-reaching decisions than most people thought possible. Merkel, Sarkozy, Barroso and Obama all said so. The summit was also remarkable for its recognition of the realities of a changing world economy and the ability of its disparate players to make common cause.

The G-8 is dead: long live the G-20. It would be good to think that this bodes well for an effective global response to climate change in the run-up to Copenhagen.

The Europeans could feel quite pleased with themselves. The conclusions of the London meeting delivered many of the aims which had been set by the EU spring summit and the EU finance ministers in preparation for the London meeting.

But beware of the fudge. As is usually the case on these occasions, the billions and trillions which appeared in the communiqué were not all they seemed, as the FT nicely demonstrated in its graphic. For instance, the $250bn figure to support trade finance apparently relates to the amount of trade supported rather than the cost of underwriting it, which is put at $25bn; and the much hyped extra funding for the IMF comprises some money already committed from Japan and the EU and greater borrowing in the future. The IMF will be selling some of its gold bars as well.

Will this be enough to support the economies of central and eastern Europe?

On the other hand the programme to increase the role of the new global economies in the IMF and World Bank is a recognition of the need for change, while a commitment to avoid trade restrictions provides a valuable sheet anchor to restrain protectionist pressures in difficult times.

The Merkel-Sarkozy positioning in advance of the summit and President Sarkozy’s threat to walk out were intriguing. Their pre-summit initiatives were no doubt an assertion of their independence and a way of distancing themselves from the US, particularly important for both leaders given the public resentment against an American banking system which had precipitated the crisis in the first place.

German opposition to pumping more cash into the economy along the lines advocated by Gordon Brown reflected long-standing German fears of inflation, while President Sarkozy’s threat to quit made great news coverage for him at a time when he is battling deep unpopularity at home – and just as France becomes a full member of NATO. He was able to show himself as the scourge of Anglo-Saxon capitalism.

In fact the London conclusions on financial regulation appear to fit neatly with the EU agenda agreed last month. President Barroso has already outlined the timetable for action. A beefed up global Financial Stability Board will be a valuable counterpart to the proposed EU risk assessment bodies. The European Commission will be pleased to become a member of the FSB.

Tax havens were President Sarkozy’s final battleground, aimed particularly at the 60 per cent of hedge funds which he claimed were registered in these territories. He wanted instant publication of the OECD name-and-shame list, but ran up against Chinese opposition related to the position of Hong Kong and Macao. It was President Obama who brokered a deal in the margins of the meeting, as Sarkozy himself acknowledged.

“The era of banking secrecy is over” said the final text. Let’s now see how quickly those EU countries which have still to implement the tax standard (Austria, Belgium and Luxembourg) can be persuaded to agree.

Posted in European politics, Finance, International, Trade | No Comments »

Europe prepares for G20 crisis meeting

Monday, March 9th, 2009

The European Competitiveness summit should look very different this year. The March 19-20 meeting will be struggling to finalise an EU position for the April 2 crisis meeting of the G20 in London on the basis of the Commission’s Communication.

Negotiations will take place against a profoundly uncertain economic backdrop where there are major potential risks to national economies across Europe and beyond. I have talked with old friends in Brussels who believe that the credit crisis still has a long way to run. They even talk of the need for a new Marshall Plan to rescue stricken economies. (A view which, I should say, some leaders rejected at the March 1 European Council).

“A global crisis needs a global solution. Today we have put our proposal on the table for a European response for the G20 meeting in London. Europe will speak with one voice”. So promised President Barroso when launching the Communication Driving European Recovery.

The Commission’s document plays down any sense of impending doom. Its main focus is on improved financial regulation along the lines of the February 25 report by the Jacques de Larosière taskforce.

As anticipated, this report was just what the client (ie the Commission) ordered: a European Systemic Risk Council (ESRC) based on the ECB which would provide early warning of supervisory risk, a European System of Financial Supervision (ESFS) to beef up supervision at the level of firms, extended regulation in areas of financial services which are currently unregulated and action to control the bonus culture of banks.

The main difference from the Larosière proposals is an increased urgency: the measures should be up and running in 2010, rather than over a three-year run-in period.

It’s my impression that the member states will broadly approve the proposals on financial supervision, although the Brits and other non-eurozone countries can be expected to oppose such a significant role for the European Central Bank. In any event, the EU will be determined to retain European control over prudential issues, albeit in the context of global co-ordination, and not cede power to others.

Dealing with these supervisory issues is all well and good, but essentially deals with past failures and the need to avoid them in future. Is that a sufficiently ambitious position for Europe at the G20? The challenge now is to get the world economy going again. The Communication sees the €400bn European Economic Recovery Plan providing co-ordinated stimulus to Europe’s economy, but much of that is a repackaging of existing funds and most of the funding comes from the member states themselves.

The Commission “remains committed” to working with European and international financial institutions to support the economic stability and development of potential EU candidates and neighbouring countries.

In outlining an EU position for the G20 the Commission defends free trade and global development. I just wonder whether enough attention is devoted to the concerns of the G12 – those like Argentina, Brazil, China and India which have joined the G8. At least there are calls for reform in the governance of the IMF and the World Bank, a temporary doubling of IMF resources and strengthening of its surveillance role. That does seem to recognise a global dimension.

Posted in Finance, Trade, Treaty of Lisbon | No Comments »

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 »