10 December 2007

FT: Europe's new treaty is a threat to the City of London

How excited should the City be about the European Union reform treaty, which is due to be signed this week? Apart from some rather technical articles on the powers of the European Central Bank, it says nothing specific about financial services. The temptation, with everything else that is going on, must be to ignore it.

But this would be a mistake because the treaty redistributes powers in the EU in a way that will make it easier for EU institutions to influence the regulation of financial services.

Depending on your point of view, this may be a good or a bad thing: good if you think it will lead to better regulation and more open markets, bad if you worry that EU institutions want tougher controls over the financial services sector.

The current mood on the Continent, as well as the evidence from recent EU initiatives in the financial area, makes it more likely that the outcome will be the second: financial regulation that is more intrusive and politically driven than the City is accustomed to and that could damage its interests.

The relevant aspects of the treaty concern the extension of qualified majority voting, the reduction in the number of commissioners, and the creation of greater powers for the European parliament. All these reforms will potentially make it harder for the UK to fight the City's corner at the EU negotiating table, which is crucial because there are few others who will.

The changes to QMV not only extend the areas where it applies but also make it easier for the EU to extend it to other areas later on. This opens up a huge area of uncertainty. It will also make it harder for the UK to form alliances of blocking minorities, which it did before to stop some of the excesses of the Financial Services Action Plan, the blockbuster regulation package now being implemented.

The reduction in the number of commissioners means that the UK would not have a representative on the commission for five out of every 15 years. On the face of it this should not matter, because commissioners are supposed to put national interests aside to focus on the greater good. In practice, of course, they do not, and having a permanent commissioner has given the UK a powerful influence over EU affairs.

The treaty's reform of European parliament procedures will give a stronger voice to the EU's more populist elements, which may be a good thing but could also offer greater scope to those members of the EU who view the City with suspicion, and want to see its "locusts" reined in.

All these changes are potentially worrisome because of the unique status of the City in the EU. It is both the largest financial centre by a long way, andclosely identified with a single country. There is no comparable concentration of business activity anywhere else in Europe: the other big sectors such as chemicals, telecoms, energy and manufacturing are much more evenly spread, which means there is a wider common interest among member countries in making good policy. The City has few champions in Brussels and Strasbourg other than the UK itself and if the UK's power to influence events is curtailed by the treaty, the City will suffer.

This would not matter if the rest of the EU recognised the value of the City as an EU-wide asset - which it is, as a provider of markets, jobs and an international voice for the Union - and was ready to support it. But outside a relatively small circle of people interested in international financial affairs, this is not the case. Rather the opposite. The political mood in the EU has been growing hostile towards the City because of the predations of private equity raiders and hedge funds. The proposals put forward by Tommaso Paddoa-Schioppa, the Italian finance minister, to centralise financial regulation and liquidity management in the EU are examples of the sort of measures that will be easier to push through under the treaty's new structures.

The Northern Rock fiasco has greatly weakened the case for national control of the UK's financial services. But the alternative would undoubtedly be worse: an EU agency operating with the more heavy-handed regulatory style of continental countries and probably under greater political influence.

All this is speculation. A sudden shift in the politics of EU financial services could just as easily open the way to the liberalised markets and regulation that the EU has long promised. Experience tells us that this is unlikely. The more certain outcome is a much less congenial regime than the one we have today.

© Graham Bishop