04 December 2007

Daily Telegraph: Pressure for EU 'FSA' after credit crunch

Momentum is building for the creation of an EU-wide "Super Regulator" to oversee financial markets and clamp down on short-term speculators. This could emasculate the Financial Services Authority and bring the City under the direct control of Brussels for the first time.

The European Commission as well as key EU finance ministers and leading politicians have seized on failings exposed by the credit crunch to press for a pan-European gendarme to police the banking system and cross-border flows of capital.

Tommaso Padoa-Schioppa, Italy's finance minister and a former board member of the European Central Bank, has sent a letter to EU colleagues calling for a plan to be discussed urgently at today's meeting of finance ministers. Mr Padoa-Schioppa said the Commission and the ECB had come through the crisis with flying colours, but the supervisors had failed - chiefly because they are scattered across the EU and answerable only to capitals.

"The recent financial turmoil was a revealing test of the shortcomings of the present system. It is now necessary and urgent to act decisively to enhance the European supervisory system," he wrote. He called for a "single rule book that will be enforced uniformly all over the EU", a warning to Britain that this initiative is not confined to the eurozone states. It should have "binding standards".

"It is disappointing that no sharing of confidential information on potential systemic risks to the European financial system appears to have taken place among EU supervisors. In crisis situations, European supervisors can be expected to act based on a narrow national perspective."

Economics commissioner Joaquin Almunia made similar comments to Euro-MPs yesterday, suggesting that the campaign has been well co-ordinated by EU insiders. "Pressure is mounting for European supervisory arrangements. Financial institutions should be subject to essentially the same rules irrespective of where they operate in the Single Market." Specifically, he called for "qualified majority voting on all decisions" in certain areas, leaving Britain without a veto.

British officials said Chancellor Alistair Darling would oppose the plans at the meeting in

Brussels, saying there was no need to re-invent the wheel when adequate safeguards were in place. But Mr Darling now faces the combined might of Italy, France and Germany from a position of weakness.

German chancellor Angela Merkel yesterday called for "intelligent regulation of international financial markets so that highly speculative and short-term financial movements do not cause a crisis." The comments appear to put her in the same camp as French president Nicolas Sarkozy, who has called for a clamp-down on hedge funds, private equity groups and speculators in a bid to "remoralise" finance.

British governments have fought to prevent Brussels encroaching on the City, insisting that the UK is already a model of efficient regulation that has little to learn from Europe. This claim is in tatters after the Northern Rock debacle.

Mr Almunia revealed his contempt for the UK authorities in a candid interview to La Vanguardia newspaper in his home country of Spain, noting that the eurozone had held up better than Britain when the credit crunch hit. "We didn't have people lining up outside the banks, and we didn't have to hand out liquidity to a bank. It's worth noting because there are people who think they can give us lessons in monetary policy," he said.

Any move by the EU to curtail "short-term financial movements" would probably have to involve some form of exchange controls - a severe blow to the City. A European Commission study concluded four years ago that the EU treaties allow Brussels to impose "quantitative restrictions" on capital inflows. "Should extremely disturbing capital movements endanger the operation of economic and monetary union, Article 59 EC provides for the possibility to adopt restrictive measures for a period not exceeding six months," it said.

Any decision would be renewable each six months, and passed by majority vote. The document appeared far-fetched at the time but this year's credit crunch has brought matters to a head. EU experts say a key motive behind the latest drive for an EU Super- Regulator is concern that the eurozone's vulnerable "Club Med" countries may find themselves in trouble next year as their housing booms deflate.

© Graham Bishop