European Union leaders avoided a row over bank regulation—but only by being ambiguous.
TWO DAYS after Barack Obama announced what he intends to be the biggest overhaul of American financial regulation since the Depression era, the European Union’s leaders, meeting in Brussels on June 18th and 19th, agreed that financial institutions in the 27-country block should be subject to common rules and overseen by new EU-level supervisors able to make binding rulings in disputes between national regulators. The heads of national government also agreed to create a European Systemic Risk Board, charged with providing early warning of potential threats to financial stability. The French president, Nicolas Sarkozy, hailed Britain’s agreement to the plan as a “complete change in Anglo-Saxon strategy” on financial regulation. But was it? The British prime minister, Gordon Brown, insisted he had conceded nothing.
The 27 national leaders offered unanimous backing for the creation of a trio of EU supervisory authorities to watch over the banking, insurance and securities sectors. These would have the power to resolve clashes between national supervisors in financial firms’ home and host countries, and to decree that national supervisors were flouting EU rules. At the moment, multinational banks and other financial institutions are watched over by a patchwork of national bodies, with no clear mechanisms for resolving disputes.
Within the EU, France and Germany have been in the forefront of calling for ambitious European regulation of financial markets. That has raised alarm in the City of London, which is by far the largest financial centre in Europe. Earlier this month, Lord Myners, a government minister with responsibility for the City, told a House of Commons committee that Britain opposed an EU-level supervision, “because national governments are the only bodies capable of providing any fiscal support to firms.”
The idea of a clash of wills among Europe’s biggest powers was reinforced shortly before the summit, when Mr Sarkozy gave a speech pledging to rein in a global financial system “rendered mad by a total absence of regulation”. In the event, the summit passed off without public clashes, and Mr Brown secured a guarantee that national governments, and not the new European supervisors, will have a final say when it comes to decisions that involve taxpayers' money, such as calls to bail out failing banks. The new pan-European supervisors would improve the quality of cross-border supervision, Mr Brown said. However, he added: “I have ensured that the British taxpayer will be fully protected on this.”
Britain led the charge to secure language that EU supervisors’ decisions “should not impinge in any way on the fiscal responsibilities” of member nations of the union. But in truth other countries were hiding their own doubts behind British objections, as Mr Sarkozy himself acknowledged. Germany’s chancellor, Angela Merkel, was also “concerned” about the idea of regulators at the European level having responsibility over decisions that would have to be paid for at the national level, he said.
How this guarantee will be squared with the principle of EU-level supervision remains to be seen, senior officials admitted. The wrangling can be expected to resume again when the laws and directives to implement the EU leaders’ agreement are drafted by the European Commission later this year.
Ambiguity also surrounded the method that will be used to choose the head of the new systemic-risk council. Britain argued against a proposal from the European Commission that the council should at all times be headed by the president of the European Central Bank (ECB). As one of 11 EU countries that does not use the euro, Britain wields limited influence in the ECB. In the end, EU leaders decided that the chairman of the new systemic-risk watchdog would be elected by central-bank governors from all 27 EU countries; although as the French president unhelpfully noted, this was not much of a concession, since euro-zone countries hold a permanent majority within the union.
More broadly, senior politicians and officials were at pains to defend Europe from charges of falling behind America, when it comes to crafting new regulations for the financial system. Mr Obama’s reforms were in fact “much inspired” by European plans, insisted a senior EU official, speaking off-the-record, citing the example of a systemic-risk council, which was first mooted in Europe. Moreover, it was easier for America to move quickly, as it was a single federal country, with one president, one treasury and one central bank. Europe had “28 central banks”, said the Eurocrat, counting the national banks and the ECB.
The battles are not over. Further EU legislation is coming on hedge funds, executive pay and other issues that have become favoured talking points for European politicians keen to blame the crisis on “Anglo-Saxon” excesses. As Mr Sarkozy said, with apparent relish, at the summit’s end, the measures agreed so far were only a starting point, and would doubtless “evolve”.
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