Financial regulation: The EU’s agenda

European Union leaders have agreed a common agenda ahead of the G20 summit in London, pushing for tighter rules to regulate global financial markets including tax havens – EURACTIV offers an overview of the state of play.

Hintergrund

The repercussions of the global financial crisis on the real economy have been severe, with unemployment increasing across Europe. Some EU member states have been severely affected. The International Monetary Fund (IMF), the EU and the World Bank agreed a $25.1 billion economic rescue package for Hungary last November (EURACTIV 20/03/09). 

Other countries that have been significantly affected include Ireland, where the prime minister, Brian Cowen, predicted that the country will see a "10% drop in living standards over the next two years". Romania recently obtained an international bailout package worth 20 billion euro (EURACTIV 26/03/09).

Public responses: Stimulus or regulation?

A gulf has emerged between countries that want to increase the size of their fiscal stimuli, and those who prefer to concentrate on fixing regulation. The Obama-lead US administration has urged its European partners to increase the size of their stimulus plans, while German Chancellor Angela Merkel and French President Nicolas Sarkozy have led resistance to the calls, preferring to focus their efforts on reaching a global agreement on regulation (EURACTIV 19/03/09). 

The Franco-German line ended up prevailing among EU leaders, who thrashed out a common strategy before the G20 summit in London, pushing for tighter rules to regulate global financial markets and tax havens. But they did not make any additional commitments to fiscal stimulus plans promoted by the United States (EURACTIV 20/03/09).

The host of the London summit, Gordon Brown, has in the past called for an increased fiscal stimulus. However, Brown will be limited in his choice by the UK's own precarious fiscal position (EURACTIV 25/03/09). 

A more coherent position from the G20 members would greatly help consumer confidence. The current lack of consensus is perpetuating uncertainty and consumer pessimism. The absence of a coordinated response is diluting the effects of individual stimulus packages, and there is thus considerable pressure on leaders to reach agreement at the G20. 

Probleme

The European Union is currently in the process of approving measures to tighten regulation of financial markets, banks and insurance companies. They include:

A European financial supervision package (set for approval before the end of May 2009). The package will include two elements: 

  • Macro-prudential supervision: Measures to establish a European body to oversee the stability of the financial system as a whole.
  • Micro-prudential supervision: Proposals on the architecture of a European financial supervision system

Regulating capital markets and market actors    

The Commission is taking a 'safety first approach' to regulating capital markets and market actors, and will fill in the gaps where European or national regulation is insufficient or incomplete:

  • Credit rating agencies: The failure of the credit rating agencies to uncover the true value of sub-prime mortgage backed securities has resulted in calls for greater regulation of the sector. The Commission tabled proposals in November (EURACTIV 13/11/08), set for final approval in April (EURACTIV 25/03/09).
  • Hedge funds and private equity: A comprehensive legislative instrument establishing regulatory and supervisory standards for hedge funds, private equity and other systemically important market players (Due: April 2009). (EURACTIV 27/02/09).
  • Crisis prevention: A White Paper on tools for early intervention to prevent a crisis (Due: June 2009). 
  • Derivatives: A report on derivatives and other complex structured products will provide a basis for Commission initiatives to increase transparency and ensure financial stability (Due: June 2009).
  • Prudential capital: Legislative proposals to increase the quality and quantity of trading-book activities and tackle complex securitisation (Due: June 2009), and to address liquidity risk and excessive leverage (Due: Autumn 2009). 
  • Supervisory rules: A rolling programme of actions beginning in 2009 to establish a far more consistent set of supervisory rules. 

Retail financial products 

The economic crisis has unnerved European savers as banks have come close to collapsing, while credit has become less and less accessible. The Commission hopes to bring political consensus to bear on these issues as it unveils initiatives in the coming year:

  • Retail investment products: A Communication on Retail Investment Products to strengthen the effectiveness of marketing safeguards will be published (Due: April 2009). 
  • Investor and financial consumer protection: The Commission will unveil further measures to reinforce bank depositor, investor and insurance policy-holder protection (Due: Autumn 2009). 
  • Responsible Lending: Measures on responsible lending and borrowing are due in autumn 2009.

Risk management and executive pay 

The EU executive is planning to act to improve risk management in financial firms and align pay incentives with sustainable performance:

  • Remuneration of directors: The Commission will strengthen its 2004 Recommendation on the Remuneration of Directors (Due: April 2009). 
  • Remuneration in financial services: A new Recommendation on Remuneration in the Financial Services Sector (Due: April 2009) followed by legislative proposals to include remuneration schemes within the scope of prudential oversight (Due: Autumn 2009). 

Sanctions on market abusers 

To ensure more effective sanctions against market wrongdoing, the Commission will take the following steps: 

  • Market abuse: Review the Market Abuse Directive (Due: Autumn 2009). 
  • Strengthening sanctions: The Commission will make proposals on how sanctions could be strengthened in a harmonised manner and better enforced (Due: Autumn 2009).

Insurance

Reform of insurance regulation is edging closer to being finalised: 

  • Solvency II: Proposes a new risk-based approach as an alternative to the existing 'flat-rate' system for capital requirements. It also aims to reform supervision procedures, with the intention of increasing cooperation among national supervisors, especially for multinational companies. [Vote in the European Parliament: April 22 (EURACTIV 26/03/09)].

Positionen

EU Employment and Social Affairs Commissioner Vladimir Špidla said: "The economic crisis is a global crisis and is hitting labour markets around the world. We need to find global solutions to tackle its social impacts and to help people who are losing their jobs. Our priority has to be to keep people in work wherever possible, and to maintain and improve their skills so they can find new jobs. By coordinating our action at a global level, we can make sure that the human dimension is at the centre of discussions on improving international governance" (EURACTIV 31/03/09). 

"The first priority is to build a new global financial architecture. The European Union must assert a common position and take the lead on this issue," stressed German Chancellor Angela Merkel  and French President Nicolas Sarkozy in a letter published on 17 March (EURACTIV 18/03/09). 

"We are determined to obtain concrete results at the London summit to strengthen international financial regulation […] The European Union must propose that all hedge funds and other funds likely to create a systemic risk are subject to appropriate registration, regulation and supervision," the leaders continued. 

Speaking to the Financial Times, US President Barack Obama emphasised the need for G20 leaders to sing from the same hymn sheet: "The most important task for all of us is to deliver a strong message of unity in the face of crisis," he said. 

"I am confident that if we are persistent and we don't approach this with a thought that there is a silver bullet out there but instead we are willing to try a range of methods [...] that we will get out of this current crisis," Obama said. 

In a speech to the European Parliament on 24 March, British Prime Minister Gordon Brown invited Europe to "take a central role" in leading the global reaction to the economic crisis (EURACTIV 25/03/09).

Brown called for Europe to take the lead in "replacing what was called the old Washington consensus with a new consensus of our times". He called for a coordinated "worldwide fiscal and monetary stimulus," saying this would be "twice as effective in every country if it is adopted by all countries". 

On the same day (24 March), Brown made his speech to the European Parliament, Mervyn King, governor of the Bank of England, suggested that the British government should be "cautious about going further" in using fiscal measures that would "expand the size of our deficits" (EURACTIV 25/03/09). 

Speaking before the British Parliament, King said "there is no doubt that we are facing very large fiscal deficits over the next two to three years". 

"I think the fiscal position in the UK is not one where we could say, well, why don't we just engage in another significant round of fiscal stimulus," he warned. 

Paul Krugman, a Nobel Prize-winning economist, on 17 March in Brussels described Europe's response to the economic crisis as "entirely inadequate," suggesting that the continent needs a "large and sustained stimulus package to get out" of the crisis (EURACTIV 19/03/09). 

He pointed out that the American economy had recovered from the Great Depression "with a little fiscal expansion called World War II," which he said gives an indication of "the size of the stimulus needed". The European stimuli, all well below 4% of GDP, are "entirely inadequate," he explained. 

Former chief economist of the European Bank for Reconstruction and Development Professor Willem Buiter is not hopeful of success at the London summit. He posted on his blog that "the Group of Twenty (G20) meetings that start on 2 April ought to have started on 1 April instead. That way, when nothing but hot air emanates from the Docklands venue, at least the organisers of the event will be able to claim it was all an April fool's joke". 

Zeitstrahl

  • Oct. 2008: Commisison appionts ad hoc high-level group on financial supervision, chaired by former IMF managing director Jacques de Larosière (EURACTIV 23/10/08).
  • 15 Nov. 2008: G20 summit in Washington agrees five-point action plan to reform global financial markets (EURACTIV 17/11/08).
  • 25 Feb.: De Larosière groups hands in report (EURACTIV 26/02/09).
  • 5 March: Commission tables proposal for G20 (EURACTIV 5/03/09).
  • 19-20 March: EU summit endorses common position for G20 (EURACTIV 20/03/09).
  • 2-3 April: G20 summit in London.
  • April: Commission to present measures on hedge funds, private equity, retail investment products and remuneration in financial services.
  • By end of May:  Commission to present European financial supervision package.
  • June: Expected agreement on follow-up to De Larosière report.
  • June: Commission plans to present a White Paper on Tools for Early Intervention to Prevent Crises, and legislative proposals to increase the quality and the quantity of prudential capital.
  • First half 2009: Legislative proposal from the Commission on hedge funds and private equity.
  • Before end 2009: EU expected to finalise approval of financial regulation measures.

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