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Welcome to Graham's Rolling Blog Archive These are quick commentaries written by Graham on events and developments  in European politics, finance, economics and budgets. Graham is a  Consultant on EU Integration. Click here for more on services for the Friends of GrahamBishop.com

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19 December 2014

December 18^th European Council: Where was the financial/economic content?

Perhaps not much should have been expected from this Summit as the economic crisis is not extreme at the moment and the shadow of Russian activities in Ukraine was hanging over the meeting. Nonetheless, it was an exceptionally anodyne outcome:

For financial markets, there was a generalised blessing of the concept of capital market union. It may be a year or two yet before the Heads of State/Government (HoSGs) actually come face to face with the practical implications of what is needed to give effect to this concept. They may be quite surprised to find the full implications to which they are effectively signed up already.

For economic governance, the `Four Presidents’ are to be wheeled out again but this time, they are merely requested to produce an `analytical note’ in February.  But the spectre of France’s failure to reform sufficiently must surely be looming over the HoSGs.

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18th December 2014

105th Brussels for Breakfast

Visit the BBA to see my new `Vlog' of B4B - hopefully setting the template for 2015!

Commission Work Programme for 2015: A plan for 23 new initiatives had been announced – a long way down from the 300+ of a few years ago.

• CMU: Capital Market Union should be viewed as a package. It might well contain quite a number of legislative measures in the next few years. Some of these, such as securities law and insolvency, would be extremely complex and substantial. A `very Green’ paper is due in January and may be little more than a list of questions.
• Resolution of non-bank financial institutions: A proposal is due early in 2015 and the later discussion showed why it could be highly controversial.
• Tax: Re-launch of CCCTB – Common Corporate Consolidated Tax Base
• Withdrawn – `investor compensation scheme’: The Member States appeared to have no interest in it.
• Unclear: Implementation of the proposal based on the Liikanen Report. However, several subsequent discussions showed that banks may choose to split off activities under the pressure of capital requirements, the leverage ratio and the SSM’s drive for banks to be genuinely profitable so that they could actually serve their basic purpose of lending to the economy.

Banking Bonuses: The Advocate General ruled against the UK’s petition and the UK Government then withdrew its case rather than take it on to a hearing of the full Court. The UK case was not seen as strong but a wider debate was triggered. Should there have been a full impact assessment? Were politicians making up ideas as they went along – and was that risking a breach of the rule of law? The UK is now developing a track record for launching weak cases that are then dismissed. However, the FTT dismissal was on the grounds of being premature and may in fact have influenced the subsequent debate quite substantially.

ELTIF: The proposal for European Long Term Investment Funds was approved and the Commission’s motivation for the proposal was clear but the potential demand for the product was seen as uncertain. However, it seems that some pension funds have an internal requirement that they can only buy products that are open to retail investors. Nonetheless, this proposal is touted as a significant contribution to Capital Market Union - despite a clear risk of an unenthusiastic take-up.

The discussion in the securities segment centred on CCPs: ESMA’s Chairman had given a speech on measures to prevent another crisis and he wants more data on “super spreaders” of financial contagion. The concerns expressed about the risks of CCPs should be in the context that only 27% of CDS contracts are on CCPs even now. ISDA had published a set of principles to ensure CCPs cannot become `too big to fail’ and senior officials are querying if CCPs are actually resolvable in their current form.

Next events:     106^th - January 13^th      107^th – February 17^th

 

(Brussels for Breakfast is organised by the CSFI and hosted by the British Bankers Association - with Hans Hack (FTI Consulting) and Alexandria Carr (Mayer Brown) as fellow speakers.)

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24 November 2014

The 'Cameron' EU policy: Progressive meltdown epitomised by ECJ rejection of `bankers’ bonus’ case

The pace of collapse seems to be accelerating – and the commercial consequences for the UK may well intensify correspondingly, especially for the City of London. The timeline of the divergence between David Cameron’s attitude to the EU and mainstream EU opinion stretches back at least a decade. The enduring characteristic of the `Cameron policy’ is a lack of strategic thinking about the longer-run implications. Instead, he seems to focus on the immediate short-run benefits:

1. Leave EPP – May 2009 ahead of EP election.

2. Veto a Treaty – December 2011: Subsequently, TSCG was signed on 1 March 2012 and now ratified by 25 EU States

3. Attack on free movement of persons – November 2013 onwards

4. Short–selling -January 2014:  action dismissed by ECJ.

5. FTT – April 2014: action dismissed by ECJ

6. Veto Juncker – June 2014 onwards: Juncker is now President of the Commission

7. Surcharge – October 2014: Was it really `halved’?  

8. Bankers Bonus - November 2014: action dismissed by ECJ

9. The United Kingdom versus ECB on CCPs – perhaps in May 2015?

For the financial services industry, the real commercial problem is now looming. With UK political clout minimal, the Government is resorting instead to suing the rest of the Members in the European Court of Justice (ECJ). So far, the UK has failed in every financial services case – with its arguments almost entirely rejected. Reading the ECJ decisions, even a layman can understand why the flimsy arguments have been rejected. However, the most significant ECJ case is yet to come. In September, I explained that the ECJ will pronounce judgment on three cases brought by the UK Government against the ECB on the location of CCPs. (European Court of Justice: The United Kingdom versus ECB on CCPs)

British business now faces an excruciating dilemma: should it support its traditional political ally (the Conservative Party), or the Labour Party, do something entirely different, or sit on its hands?

Ahead of the General Election next May, the UK Government is focussing on the `sunny uplands’ of economic growth, falling unemployment, and low inflation etc. But the Prime Minster needs to look over his shoulder and see some inky-black clouds rolling over the horizon behind him. The logical consequences of his `EU policy’ may blot out the sun all too soon.

Full article for clients of Graham Bishop

 

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18 November 2014

Where will #TeamJuncker EU find €300 billion by Xmas for the new investment fund? Some Q&A

Questions raised:

• FT: French Finance Minister Emmanuel Macron said France wanted the EU to come up with €60bn-€80bn in cash as part of the overall plan – far more than is currently under consideration – to directly finance investments or provide equity capital for projects.
• Reuters: So the Commission plans to use what little public money is available to lure bigger private funds into projects that would otherwise seem too risky or with too low a rate of return. "Our aim is to 'crowd in' private money for big infrastructure projects in the energy sector, transport, broadband or research and development. The private sector cannot take all the risks," Commission Vice President Jyrki Katainen told Reuters. Structural funds that poorer EU countries receive could be leveraged in a similar way as with EU project bonds, under which EU cash becomes a first loss guarantee on a debt issue from private investors, he said.
• FT: According to officials, and documents seen by the Financial Times, the structure most favoured by the commission would use public money as a “first-loss tranche” in new special purpose vehicles. The EU would take most of the downside risks from any investment, while allowing private investors to benefit from any financial gains. Several funds with different risk profiles could be offered.

An answer:

A glance at Insurance Europe’s table of private sector assets (see below) indicates clearly who has the deep pockets! However, it is not that simple as the insurance industry is split between life and non-life. The latter typically holds shorter-term assets to pay claims. Life premiums of €661 billion are about 60% of total premiums so crudely applying the same split to the assets suggests that EU life companies have about €5,000 billion of assets and about 70% of that is at management’s investment discretion. Just over half the assets are in fixed income/loans - a pool of around €2,000 billion.  

Team Juncker is looking for a €300 billion fund to invest over the next three years so 5% of life premiums could make a €100 billion contribution. BUT there must be a caveat: that money might otherwise go into government bonds to finance `routine’ deficits. How much better for the EU’s productive potential if it went directly into investments that would genuinely raise productivity! Who better to judge than real long-term investors instead of short-term governments looking to the next election? Step forward the insurance industry… (and stimulating the pension funds and retail investors?)

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18 November 2014

104th Brussels for Breakfast

(Organised by the CSFI and hosted by the British Bankers Association - with Prof Rosa Lastra (Queen Mary University of London) and David Harley (Burston Marsteller) as fellow speakers.)

ESAs write to ECON: Budget requests were cut back yet the number of tasks for the ESAs continue to rise. The cuts will “severely undermine ESAs’ capacity to deliver” – strong comments ahead of a tsunami of detail.

SSM operational from 4 November: the magnitude of the pooling of political sovereignty implied by this change is now beginning to sink in to financial specialists - but the UK’s body politic has no idea about it. The complexities of how it will interact with ECB’s monetary policy responsibilities remain to be worked out in practice but SSM chair Daniele Nouy was quite clear about the opportunity to “build a culture of supervision that is truly European”

The ECB AQR/stress test and the EBA stress test results:despite the media hype, European bank shares continue to trade in a narrow range – as they have for the past year. No surprise in aggregate to the owners of bank shares! This probably reflected their purchase of €54 billion of equity and €39 billion of Co-Co bonds during 2014. Nonetheless, the AQR marked up non-performing loans by €136 billion to €879 billion.

Systemic Banks face a TLAC of 16-20%: the G20 seems to have rubber-stamped the FSB proposals for a further massive increase in the capital of too-big-to-fail banks.  What are the implications for Capital Market Union?

 Commissioner Hill “Over 400 delegated and implementing acts yet to be adopted”: B4Bexpects lively debates for some time to come… but it is deeply disturbing that `the Devil’ will get into some of this.

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25 October 2014

More analysis for Graham Bishop consultancy clients

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15 October 2014

103rd Brussels for Breakfast

(Organised by the CSFI and hosted the British Bankers Association, with David Reed of Kreab Gavin Anderson as a fellow speaker.)

“Brussels” is now well back into the political swing, even though the legislative tide has not yet resumed. The key discussion points included:

Commissioner Hearings: For financial services, the crucial Hearings were for Commissioner Hill.  He may have boxed himself into being the most `European’ Commissioner and his written responses by the 9PM Sunday evening deadline did provide the detail that his first appearance lacked. His commitments to Capital Market Union are certainly bold and triggered debate on what actually needs to be done to make it happen.

ECB’s Comprehensive Assessment (AQR and Stress Test): Sitting in BBA’s offices, what else could we talk about??? So we all wait for noon on October 26^th to plough through 18,000 data points for each of 130 banks…  The market seems to have 9 banks in the frame as needing assistance but €200 billion of capital has been raised in the past year. (I assume this will dominate discussions next month!)

Settlement from T+3 to T+2: There was one unambiguous piece of good news – the bond markets have shortened the settlement cycle by a day. This was one of the `barriers’ identified when I sat on the Giovaninni Group a decade ago… but good to see it happen without great difficulty.

Data Problems: The shock of the morning was the discovery that problems of data consistency between the US and the EU mean that much of the work of Trade Repositories etc was being wasted… what does that mean for the regulators’ ability to spot problems ahead of a crisis??

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7 October 2014

Hill looks have done enough at EP Hearings 2014 to be nominated

Far more confident and properly informed

·         His next step: thorough analysis of steps needed to achieve CMU. But this must go much broader than `good securitisation’ to fund SMEs and must not be too lengthy. All too easy to take a long time, then prepare legislation and pretty soon the term is over. All too often just a de facto three year term of actions.

·         European credentials: strongly re-iterated, notably in the comments about the pre-crisis degree of integration was not enough. If more is needed, he will act. So the City will be pleased that CMU will move swiftly ahead but Prime Minister Cameron may quail at the thought of selling yet more `ever closer union’ to his Party members hovering on the brink of UKIP-ing.

·         Independence: impressive set of vows to behave in the `European interest’ that gave many hostages to fortune – deliberately and rightly. He may have boxed himself into becoming the most “European” Commissioner!

·         Supporting SMEs: all the economic Commissioners have joined in this wave of enthusiasm and, as a micro-SME, I applaud it thoroughly. But it must be tinged with a note of caution: during my career, every time politicians have called for lowering of standards for SMEs, the fraudsters have rubbed their hands and embarrassing disasters strike a few years later.

·         First piece of legislation - Resolution of CCPs. Many will scratch their heads and ask what the acronym means but they may find out soon enough – hopefully only as a political clash between the UK and the ECB, rather than an immediate need to resolve the financial equivalent of a nuclear power station- brilliant in success, catastrophic in failure (See my article in this month’s Financial World – link to come for Friends access)

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6 October 2014

Commissioner Hill responds to ECON’s 23 questions: gets eurobills right!

Read his 26 pages of detailed answers. These show that he `gets’ #ECON’s concerns, and a thorough job by his services on the details. His commitment to avoid any more `double-majority’ deals may not be popular with Cameron but the City should be pleased with spelling out Capital Market Union.

Eurobonds: spot on that it is “very unlikely that a consensus on issuance of Eurobonds can be achieved among the euro-area Member States at this time.” But once VP Dombrovskis has gone through the new economic governance process and assuaged the Expert Group’s qualms on its efficacy, the way should be open for euro-bills as they were carefully not ruled out.

This should dispel ECON’s concerns about his capability – but no client names provided….

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6 October 2014

The benefits of `Capital Market Union’ (CMU) to EU citizens, businesses and economies: Getting the regulatory framework right

•  The Juncker Commission is set to implement the European Council’s priorities and his own Political Guidelines (see Appendix II for extracts) to deepen the single market and strengthen euro area governance and co-ordination.
•   Banking union pools sovereignty massively but a capital market union (CMU) can offset that whilst deepening the single market.
•   CMU can also avoid the pro-cyclicality that is inherent in most EU financial intermediation lying in the hands of financial institutions that are subject to strict rules on matching assets and liabilities. Probably there cannot be a single regulator for such a union.
•  As a first step, the new Commission should start with a stock-taking exercise to confirm what still needs to be done to create the single financial market. As the pre-eminent centre for such activities for the entire EU, the City should be well placed to benefit from CMU.
•   My proposal for a Temporary Eurobill Fund (TEF) would create a genuine, single European yield curve for this market sector. Participating governments would also have the right to re-finance maturing issues by borrowing from the TEF – thus removing roll-over risk, enhancing financial stability and increasing financial integration. The TEF would constitute a natural foundation for CMU - thus facilitating the private sector raising large volumes of cheaper, short and long term funds to invest in the economy. (See Appendix: What is the TEF?)
• However, the loss of influence of the UK (and other non-euro states) in EU legislation is a risk and will be exacerbated by the `Putin game-changer’ in the Council.  If Poland now acts as a serious EMU `pre-in’ and votes with the euro area, it will pass the threshold for a QMV. Such `caucus’ votes can be expected on matters they believe to be vital to the future of the euro, even if that means that non-euro states are outvoted. 
•   Possible example: UK Government action at the European Court of Justice against the ECB on the location of CCPs.  Implications for the City and UK are significant. If CCPs were to move to the eurozone, how much of London’s euro-denominated trading would wish (or need) to follow?

Full 10-page Evidence for Graham Bishop consultancy clients

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2 October 2014

Hill at ECON

After three hours of grilling yesterday, Hill seemed to have won over doubters on many points as his UK Parliamentary schooling has certainly taught him how to charm opponents. BUT it seems that was not enough as the Committee clearly felt that he was insufficiently informed on the issues and now wants a second Hearing. But this raises a problem of logic for the Committee itself.

The Committee’s comments have focussed on his technical grasp of his dossier – and with some reason. In the 10 days since being given the specific brief, he will have had a steep learning curve. Does the Committee want him to come forward with detailed proposals for every aspect of say Capital Market Union? Surely not – or what would be the point of subsequent consultations etc. How could these views have been created without such full consultations – the essence of the Lamfalussy process pushed through at the insistence of the ECON committee circa 2002?

What next? Doubtless DG `Financial Stability’ will now analyse every question from ECON members and prepare the next Hearing with a discussion of the issues involved to display a depth of understanding. But it would still be entirely wrong to propose detailed policy prescriptions put together on the back of the proverbial `fag packet’.

Commissioner Hill may be a bit chastened when he takes office on 1 November – but he will certainly treat ECON with due respect. That should cement a co-operation that will be good for Europe.

More for Graham Bishop clients Hill at ECON

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15 September, 2014

What is Capital Market Union?

It is the smooth flow of capital – at savers’ own risk - from them directly to users throughout the European Union. The credit standing of users will range from outstanding to just-acceptable, and the maturity of transactions will range from overnight to decades. The financial institutions that intermediate these flows will be regulated by the EU’s single rulebook for all participants in financial markets.

This vision is much wider than the non-exclusive list in President-Elect Junker’s letter to Jonathan Hill. It would bolster financial stability and promote the effective implementation of euro monetary policy in all parts of the eurozone economy. Crucially, it is profoundly de-centralising of economic, and thus political, power

More for Graham Bishop clients  

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11 September 2014

102^nd Brussels for Breakfast

(Organised by the CSFI and hosted the British Bankers Association, with John-Paul Dryden of Brunswick.)

The new European Commission dominated discussion – though perhaps less than I expected. Of course, the major topic was the astonishment that President-Elect Juncker had offered such an olive branch to the UK by appointing Lord Hill to cover financial services. The key question is whether the European Parliament might obstruct his appointment given the negative noises from the Socialists and Greens? The assumption was that the Juncker team must have satisfied themselves about his “European commitment” – a treaty requirement. The requirement of “independence” may be more difficult for him to demonstrate, so the City’s rejoicing may be short-lived as he seeks to prove that. However, it was hoped that Nigel Farage’s comment that Lord Hill would be the “hangman of UK financial services” would prove as vacuous as usual.

The second aspect was the number of former Prime Ministers and Deputy Prime Ministers, as well as former minsters and MEPs. What does this portend? As the eurozone consolidates into a closer union, it can hardly be surprising that the smaller states see the Commission as a way of maximising their influence. But the end result is that this Commission has much more of the look of an executive body for Europe (or at least the euro area!)

The results of the AQR and stress tests are getting ever-closer – perhaps only five weeks away, as the ECB takes up its full supervisory functions on 4^th November. We now have the list of 120 institutions – holding 85% of the banking assets of the euro area. The starting point for the EBA’s 2014 stress test will be the 2013 balance sheets after adjustment for the AQR results. The scale of the exercise is daunting – 12,000 data points for each bank! Moreover, the EBA has now published its requirements for “recovery plans” – as part of the Banking Single Rule Book.

ESMA’s Guideline’s on the Principles for Financial Market Infrastructure (PFMI) were discussed in the context of the forthcoming ECJ judgement on the UK’s case against the ECB for requiring euro infrastructure to be located in the euro area.  The application of PFMIs were foreseen in EMIR – agreed by all 28 States – and they include jurisdictional requirements. (Graham Bishop’s article on this topic will be published in the October edition of Financial World)

The implications of EMIR were also being felt in the debate about the availability of collateral for insurance companies (amongst others).

The IASB has finally issued IFRS9 on accounting for Financial Instruments. The question of impairments and `expected losses’ was debated intensely at the height of the crisis. Now we have the definitive answers as to what investors should be told.

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10 September 2014

(Evening comment) Two massive olive branches to the UK and France

In the economics field, two massive olive branches have been held out to Britain and France. These look like the shrewd movers of an experienced `fixer' as they offer two of the most difficult states - for entirely different reasons – an opportunity for a graceful return to a more European path. An olive branch can be proffered but it requires the other side to accept it. France may be willing but unable – the UK may be just simply unwilling!

·            An unexpected bright note for the City has been struck by president-elect Juncker’s appointment of the UK’s Lord Hill as the - highly influential - commissioner for financial services and (explicitly) capital market union.  Hill’s role will be vital for the City and it may bolster political support for `Europe’ within the UK. However, the hard fact remains that it includes responsibility for financial stability and that must surely trump `support for the UK’ – should there ever be a clash between the two. Doubtless, the European Parliament will want to be satisfied on this aspect during his nomination hearings. The imminent ECJ judgement on the UK’s case against the ECB for requiring CCPs handling significant volumes of euro to be localised within the jurisdiction of a euro state could provide an early test.

·            For France, the unfortunate co-incidence that French Finance Sapin had to announce that the French deficit in 2014 will rise rather than fall was especially difficult just as his predecessor was put in charge of economic affairs at EU level. However, the `team leader’ in this area is the fiscal hawk former Finnish Prime Minister Katainen. So another `early test’ could arise later this year as the Two Pack is operated for the second time and Commissioner Moscovici will have to ask to adhere to the agreed path for deficit reduction.

(Noon comment) Dear Commissioners-Designate Dombrovskis, Katainen, Moscovici and Hill

Welcome to the item at the top of your in-tray!

You have been handed pivotal roles in easing Europe out of its long-running economic crisis. It is not over by a long way and there are no magic bullets – just a long slog to remove the boulders strewn along the road. But first you must have a collective vison of the destination for the European economy. Then you must all work closely together to create a financial system that is capable of supplying credit right across the eurozone economy – from the smallest to the largest companies and across the entire continent. That is the prerequisite for economic recovery and thus jobs – and onwards to re-build political legitimacy.

• You must be bold – implement swiftly - but simply- the President’s call for a Capital Market Union
• Give power to the European people with an open union so the savers of Europe can make their own choice about where they put their money – a de-centralisation of power, both financial and political.
• Avoid the vicious pro-cyclicality inherent in the strict rules on matching assets and liabilities that govern most EU financial intermediation via banks, insurers etc.
•  My Temporary Eurobill Fund (TEF) can be a foundation for this Capital Market Union.

 

(First comment)Team Juncker is a huge reform for Europe

The new structure of the European Commission is bold, imaginative and reformist way beyond expectations! It looks as though the shake-up of the Commission’s administrative structure is amongst the biggest for decades – no tinkering, rather root and branch re-shaping for the 21^st century’s challenges. Juncker has `heard’ the call of the people in the Parliament elections and is responding with a team that looks like a real executive for an integrated Europe.

In the economics field, two massive olive branches have been held out to Britain and France

More for Graham Bishop clients

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4 September 2014

Letter to ECON

Dear Chairman Gualtieri, 

Be bold: call for a Capital Market Union
- with a Temporary Eurobill Fund as its foundation

Ideas for the Eighth Parliament: Your Committee will shortly interview the Commissioner-candidates for both economic affairs and financial regulation. The latter will have the added responsibility for framing single-market regulatory policy for the European Union as a whole. The Committee now has a key moment of influence to encourage these Commissioners to commit to principles for bold action joining up both economic and financial regulatory policy. Moreover, such policies should be sufficiently visionary to enable the ECB to adopt correspondingly bold technical measures - within its mandate and without risking accusations of usurping the democratic powers of elected politicians.

My principal macro policy suggestion is for a Capital Market Union to complement Banking Union. At the micro level, my suggestion is for a Temporary Eurobill Fund (TEF) to create a firm foundation for both.

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1 August 2014

Building blocks for #CMU: another one about to be put in place?

In his acceptance speech to the EP, President-Elect Juncker floated the idea of a “Capital Market Union” (CMU). Now the FT reports that he may be considering a carve out of financial services from DG Markt (the unit in charge of the whole Single Market portfolio) and combining it with parts of DG ECFIN. There is some logic to this – driven by the push for CMU.

However, to this author’s knowledge such a combination has been floated at this stage of forming a new Commission for at least 15 years… But maybe the time is riper this time round! Economic growth is now seen as being held hostage by a weakened banking system. I have just published a paper that sets out some principles of what needs to be done to create CMU (link) so that market–based finance can come to the rescue. The key is that the economic implications of financial regulation are carefully weighed up to balance the risks for society. Having a financial system that is 100% safe for 100% of the time will indeed be very stable, but in Chancellor Osborne’s immortal phrase (and I do not often quote him approvingly!), that would be the stability of the economic graveyard.

• See my 25 July blog below for more on CMU
• Article for Financial World on CMU link

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28 July 2014

• The shooting star `Putin’ is burning so brightly for the moment that it is having a profound impact of the EU’s governance – forcing a real Union to begin to emerge
• As expected, the three traditional centrist parties (EPP/S&D/ALDE) gained 64% of the seats. Then they formed a Grand Coalition to ensure that Parliament’s business could not be disrupted by wreckers – now effectively marginalised (as in any Parliament).
• But that agenda contains two reactions to the shooting star `Putin’: energy security will now be a major goal over the next few years - rather slower than the 24x7 media would like, but ultimately far  more deadly to the Russian economy. With a reduced flow of EU gas revenues within a few years, the `Putin’ will burn a lot less brightly. The second result of the shooting star was the failure to decide on the new EU `Foreign Minister’. A candidate who was seen as soft on Russia failed to be elected, so Putin may yet force the EU to create a much harder common foreign policy – a hallmark of a genuine Union.
• This author has been describing for some time the necessary push for the completion of the single market in capital as a `Capital Market Union’ and the use of the phrase by Commission President-elect Juncker has made it particularly timely. `Capital Market Union’ is a handy catchphrase, but can it develop into a major contribution to the deepening of European monetary union?
• Interestingly, the ECB published its convergence report on the eight euro `outs’ who are committed to join the euro in due course. Far from the euro disintegrating, it continues to expand – and may well experience a new wave of entrants during the new Parliament/Commission.

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23 July 2014

101^st Brussels for Breakfast 

Kindly hosted by the BBA, Graham Bishop and Mark Foster (of Kreab Gavin Anderson) discussed events in “Brussels” during the past month. Three events stood out: the destruction of British influence in Brussels, the implications of the Balance of Competences Review (for financial services) and Capital Market Union.

Graham introduced the event by informing participants that www.GrahamBishop.com now has a very flexible individual membership category due to the benefits of SEPA. He looks forward to many B4B participants becoming a Friend of GrahamBishop.com: click here.

1.       Prime Minster Cameron’s policy error in opposing Jean-Claude Juncker as Commission President seems to be feeding through to the logical consequences of the destruction of the City’s influence in Brussels. None of ECON’s officers are British and the only British co-ordinator is Kay Swinburne for ECR – a party that is not part of the Grand Coalition of EPP/S&D/ALDE and is therefore unlikely to have much influence. The British members of ECON (other than Kay herself) are two UKIP members and one Green. It seems that the UKIP members are as engaged as feared! The BBA’s Gergely Polner had published an excellent analysis of the decline of British officials in the Commission – in MARKT, the UK now only provides 3.5% of the staff. At the entry level, British candidates are now only 2-3 % of the successful `Concours’ applicants and the much-vaunted `EU Fast Stream’ launched by HM Government has yet to produce a single person in the Commission. 

2.       The Balance of Competence Review was published yesterday so there had not been much time to digest the substantial document. But the meeting did not disagree with the main thrust, though some feared that the excellent analysis might not have the impact it should because of its origin – epitomising the loss of UK influence. The more that detailed rules on consumer protection, the single rule-book etc move to the European level, the more essential it is that the legislation is carefully thought through in full detail for 28 legal systems. Graham Bishop said he was a long-standing opponent of excessive reliance on `single-reading’ procedures in the EP that inevitably lead on to all-night trialogues – with a clear potential for ill-considered aspects.

3.       Capital Market Union: the phrase was discussed at the last B4B and Graham has a 2,000 word article elaborating on the operational process that will appear in Financial World on 1^st August.

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03 July 2014

A capital markets union could be the next thing in EU's in-tray

Graham is quoted in the recent Reuters article "So far, the term is just a catchy title for multiple plans to secure more financing from markets for companies and infrastructure projects that would help drive growth"

For the full article click here

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29 June 2014

26 June 2014

The Treaty text on appointing the President of the European Commission

In view of the widely-debated Treaty text, it may be helpful to see what the Treaty actually says - following unanimous agreement by all the EU Governments and unanimous ratification by their Parliaments. To a reader of plain English, it seems completely clear that that a candiate can only be elected after gaining the support of a majority of the Members of the Parliament - 376 votes.

The Parliament of the United Kingdom duly ratified this Treaty and is thus bound by it. Would someone please read this brief text to PM Cameron!

Consolidated version of the Treaty on European Union: Article 17 .7 Taking into account the elections to the European Parliament and after having held the appropriate consultations, the European Council, acting by a qualified majority, shall propose to the European Parliament a candidate for President of the Commission.This candidate shall be elected by the European Parliament by a majority of its component members. If he does not obtain the required majority, the European Council, acting by a qualified majority, shall within one month propose a new candidate who shall be elected by the European Parliament following the same procedure.

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23 June 2014

Juncker to be anointed as Commission President - to "reform" the EU

The leaders of the EU’s Centre-Left parties met in Paris on Saturday and gave their crucial support to Jean-Claude Juncker. With that full support, the deal should now be done. Three other components of the deal now need to be settled:

1. The political share out of the top jobs. Already, Martin Schulz has staked his claim to be re-appointed as President of the European Parliament – a role that will give some influence on the conduct of economic policy and which could be bolstered if the Socialists decide to go for the Chair of ECON. As the largest national delegation by some way (31 - well ahead of the 27 strong German delegation or 20 British Labour MEPs), Italian Prime Minister Renzi may be emboldened enough to demand the Chair of ECON. That could tilt the balance of economic power significantly.
    
2. The policy dispute between Left and Right remains sharp – and highly focussed on the degree of flexibility within the Stability and Growth Pact (SGP). The next Commissioner of Economics – the new `Olli Rehn’ – will have a vital role in such judgements so the particular personality will be another big choice.
    
3. "Reform": everyone in the EU is in favour of this. But what do they mean by the term? The euro area certainly wants a `completion of the single market’. That requires – and therefore means for them – more integration. Banking Union is now enacted and 'merely' has to be implemented. 'Capital Market Union' is now coming over the horizon as policy-makers realise that credit to the economy will now to have to come from `market finance’ – as shadow banking is now being re-labelled. At last week’s Brussels for Breakfast – the 100^th event, see blog post below – I identified seven new items of detailed financial regulation that shift effective power to the European level. These were announced during the last four weeks alone and were just for the banking industry. This is the practical meaning of reform.

But this is the process that 54 'leaders' of British finance wrote to the Sunday Times to demand that, in some way, Britain should dis-engage from. The lack of comprehension of the practical reality is palpable. Tragically for Britain, their definition of “reform” seems to be the exact reverse of most of the other 27 members of the EU. Will the now-inevitable Summit train crash of Prime Minister Cameron’s policies be a wake-up call? It may not be loud enough even now.

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19 June 2014

Brussels for Breakfast (100) with Graham Bishop and David Harley (Burson-Marsteller) and Mats Persson (Open Europe)

At the centenary edition of the monthly Brussels for Breakfast meetings, Graham Bishop was joined by David Harley (Burson-Marsteller) and Mats Persson (Open Europe) to discuss the political and policy developments of the last month and future weeks.

The meeting first addressed political issues – notably the obstacles and ambiguities on the path to appointing the next European Commission President. It was pointed out that the Lisbon Treaty in fact contains a legal imprecision that has let to the interinstitutional conflict between the EU Council and EP about who actually has the power to appoint the Commission President: "No-one knows what the Lisbon Treaty means". The question whether Jean-Claude Juncker will be presented by the Council to the Parliament might be voted on as early as later this month, at the next Council meeting on 26/27 June. Opposition to Juncker, most prominently from the UK, could result in a blocking minority if the "swing state" Italy agrees with David Cameron. In this context, Juncker’s visit to Italy was of utmost importance.

The British position opposing Juncker so early on (and so completely) was deemed very difficult – it was suggested that in Brussels the question “how Cameron’s climb down could be organised” was already being discussed. Another hypothesis was voiced with regard to the future chair of the ECON committee in the EP – given the Italian socialists’ strong performance in the EP election, the post might well be given to the Italians, given they are the largest faction in the new S&D group.

Overall, the composition of the new Parliament was thought to have reduced somewhat the chances for a successful completion of the TTIP negotiations and the diverse nature both of the “protest parties” as well as the calls for "reform" were highlighted.

In Banking, the drive towards a capital markets union was discussed. This parallel to the Banking Union is of existential interest to the City and would include issues such as securitisation, consumer protection, shadow banking and long-term investment. The AQR was reported to be on track yet still met with doubts as it was “taking the stress out of the stress tests”.

Securitisation continued to be pushed by the ECB, for reasons of price stability, bank stability as well as the stability of its own balance sheet, as the ECB’s own booksare 15% ABS. Yves Mersch was also calling for a "more holistic approach" to ABS, saying that the ECB plans could catalyse ABS issuance, the Eurosystem could buy "simple and transparent" ABS and ratings agencies should rate ABS without a sovereign cap.

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18 June 2014

Juncker well on the way to Presidency but… not there yet!

Today’s lunch between Italian Prime Minster Renzi and Council President van Rompuy will mark another major step towards the European Council’s nomination of Jean-Claude Juncker. However, there is a critical policy issue that must be resolved before he will get the support of the S&D Group in the European Parliament.

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18 June 2014

Renzi meets HvR for lunch to discuss Juncker: read the Italian perspective here

Brilliant article by British Influence's Media Diretcor Paola Buonadonna after ringing round Italy's top jounalists.  Cameron train crash ahead? link

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12 June 2014

Is today crunch time for Juncker?

The Juncker candidacy for Commission President faces two challenges: (i) getting the support of a “QMV” of the Heads of Government in the European Council and (ii) subsequently gaining 376 votes from MEPs.

Today may be crunch day for discovering the chances of getting that number of Parliamentary votes. Council President van Rompuy meets the leaders of the EP groups today for consultations:

08:45 EPP (European People's Party) – Afterwards, EPP will hold a crucial press conference

10:00 S&D (Progressive Alliance of Socialists and Democrats)

11:15 ALDE (Alliance of Liberals and Democrats for Europe)

14:30 ECR (European Conservatives and Reformists)

17:00 Greens-EFA (The Greens–European Free Alliance)

However, the Groups are not fully formed so this can only be a preliminary set of discussions as some of the Groups cannot promise votes yet. Moreover 49% of the MEPs are newcomers (rather less than the feared 60% turnover) so their willingness to support their Group line is not yet tested. The UK Labour Party has said its 20 MEPs will not support Juncker so the Italian PD’s of Renzi may be pivotal in Parliamentary support. Without those two national groups, the combined EPP and S&D will probably fall short of the 376 votes required.  That leaves ALDE/Verhohstadt as the king-maker - again.

More  for GrahamBishop.com clients

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27 May 2014

Conference of Presidents statement on Commission President election

The European Parliament wastes no time in upstaging the Heads of Government  and raising the stakes. "The candidate of the largest Group Mr. Jean Claude Juncker will be the first to attempt to form the required majority." Link to full statement

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26 May 2014

The EP election: Eurosceptics to be marginalised in four weeks?

Nearly all the results are in and the analysis of the implications can focus on facts rather than hopes. After all the media hype about the rise of the Eurosceptics, the central and practical reality is that the `big four’ political families who are willing to share more sovereignty when necessary - `more Europe’ in the conventional shorthand – still control 70% of the seats in the new Parliament (slightly down from 76% in the Seventh Parliament). The EPP remains the single largest group – at 213 members and assuming the same national party membership - for the fourth Parliament in a row. In the event, the S&D did not do as well as the polls predicted. Far from level-pegging with the EPP, they only have 190 seats.

The next few weeks will show if the sceptics can form cohesive groupings on the Left and Right. But the real tests will come later when difficult votes take place. How will MEPs committed to unravelling `Europe’ vote when they see they will lose? Will they even vote? If not, the `grand coalition’ will continue to dominate.

However, political cohesion will have its first test on the question of the Commission President – see the short-term Timeline of events below. As the EPP is indisputably the largest group, it may be difficult for the Heads of Government to avoid giving Juncker a chance to see if he can achieve an outright majority in Parliament: 376 votes.

If the EPP could rely on support from all its members, all ALDE and all Greens, then Juncker could get 330 votes – 46 short of the majority. ECR support could just get him to the magic number. But will British Tories support him? However, a combination of EPP, S&D and ALDE – the parties fully committed to this parliamentary process of selecting teh Commissio President – could reach 467 votes – easily enough to give a majority even if some members failed to support someone of such a different political complexion. The sceptics could have their first taste of marginalisation in just four weeks.

But that is not to suggest that the major parties have failed to heed a powerful message from their voters. The clamour for `reform’ will be intense in all quarters. But there are about 751 definitions of the term.

Implications for economic and financial policy

For the economic and financial services fraternities, the key question will be membership of ECON. Returning members include many well-known names – in alphabetical order: Ferber, Ferreira, Gauzes, Giegold, Goulard, Hokmark, Lamberts, Lulling, Skinner, Swinburne, Thyssesn. Amongst the substitutes, Beres, Ford and Goebbels were returned. In all, more than 20 members and substitutes who played a significant role (in a very subjective judgement) in the last Parliament will be available to put their names forward for ECON membership. Additionally, Commissioner Rehn was elected and it is a safe bet that he will wish to join ECON. So this should allay the fears of observers that the massive turnover in the Parliament as a whole could translate into a much weaker ECON.

Source: Acumen

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21 May 2014

Brussels for Breakfast (99) with Graham Bishop and Hans Hack (FTI Consulting)

Yesterday’s B4B meeting opened with a discussion on the probable outcome and possible consequences of the European elections this coming weekend. Polls suggest that despite the rise of extreme and more populist parties on both ends of the political spectrum, the established political groups (EPP, S&D, ALDE) will win approximately two thirds of the seats in the new parliament and maybe even increase their overall share slightly.

Speculation was voiced about the future ECON chair, who was deemed likely to be from the EPP and probably German in order to balance out both past appointments and reflect the (anticipated) outcome of the election. The question how the next Commission president would be chosen divided opinions: Some saw the top candidates with a realistic chance, if not from the overall winning group, but maybe ALDE’s Verhofstadt as a compromise candidate. However, as Van Rompuy said only last week that for the Council the choice would not be automatically one of the groups’ nominated top candidates. Some in the audience considered it highly unlikely that Martin Schulz had any chance of becoming Commission president, seeing even Juncker getting the post as a rather unlikely outcome. Instead un-nominated EPP affiliated candidates like Kenny or Lagarde were mentioned. In terms of group formation in the future parliament, some doubt existed whether the current UK Conservatives’ ECR would manage to re-form after the elections.

To the question whether after the spur of regulatory and legislative activity by the outgoing Commission we could now expect a period of relative calm in financial service regulation, the answer was a resounding no, as not only regulatory activity was going to continue, but also many of the recently adopted pieces of legislation were to come up for review in the next Commission’s term. As priorities for the next financial services Commissioner were identified:

1. non-bank recovery and resolution
2. secondary legislation/ level II
3. SME funding – crowd funding and the revival of the securitisation market
4. consumer protection

In banking, the announced ECB rules on how to deal with capital shortfalls were discussed, with the AQR remaining on track. Considered noteworthy by many was the announcement of the ECB methodology that states that any bank that has received public funds in the past would be considered systemically important and hence supervised by the ECB. This would also include some of the German Landesbanken, which Germany has been so protective of in the past. In this context, Angela Merkel’s comment that there should be no political interference with the decision making process of the ECB seemed all the more relevant.
 

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16 May 2014

Commission President Debate on Europe-wide TV: 15 May 2014

Watching the great debate last night, the central question in my mind last night was: are we looking at the next President of the European Commission? Clearly, there were only three real candidates in the frame: Juncker, Schulz and Verhofstadt.

Did they have the right personal qualities to do the job? Yes – but (in my view) only Verhofstadt has the vision and charisma to project “Europe” to the 500 million people of Europe as THE way forward from the mess of the recent past. Juncker has the disadvantage of having been a central player during the entire period when the seeds of the mess were sown, and then the bitter fruits harvested.

• However, the whole process was unsatisfying in key respects: Tsipras’ blatant hijacking of a European event for the purposes of Greek national electioneering will not have raised the standing of Greece in the eyes of the rest of Europe.
• The format of 1-minute statements meant that no complex arguments could be developed – and the crisis of Europe is indeed complex.
• The limited air time for each candidate prevented any serious interrogation of the arguments of others. As a result, candidates were able to make bold (and emotionally appealing) claims about creating jobs but could not be probed on the precise polices that would cause these jobs to appear. In the current era of excessive public spending, it is the private sector that will create durable jobs. How will it be encouraged?

Despite such criticisms, these debates were an excellent first step towards creating a genuine European demos. The question now is what the Heads of Government make of the decisions of the `people of Europe’ when they meet immediately after the results of the election? As the polls stand today, neither the EPP candidate (Juncker) on the right of the political spectrum, nor the S&D candidate (Schulz) on the left will command the necessary 376 votes - a majority of the 751 members in the Parliament - to approve the Commission President. Rather they will each get around 210 – depending on party discipline. Will all the Left vote for the Right candidate? Or vice versa? Doubtful! The chances of the centrist candidate – Verhofstadt – drawing sufficient support from both sides to reach the magical 376 remain non-negligible.

If the Heads of Government decline to accept the verdict of the people, will the people's freshly and directly elected representatives decline to give 376 votes to the Heads of Governments' choice? A change in the political nature of Europe is at hand.

Graham Bishop - Consultant on EU Integration - Political, Financial, Economic, Budgetary

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Blow-by-blow commentary: Dave Keating - European Voice link

The broadcast: link

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15 May 2014

The euro crisis: The European Commission’s first attempt at counting of the cost

At long last… the Commission has published an overall assessment of the impact of the massive change in financial markets since the euro crisis struck in 2007/8. But it is close to impossible to provide a definitive answer as many of the 40 regulatory changes have only just been enacted and implementation remains quite some way off. Then comes the trade-off between the costs of higher bank capital versus credit supplies from the capital markets versus a less risky system. PHD students will spend the next decade (or two) arguing about the econometrics of this. But there is a stunning bottom line for society laid bare in the 345-page Staff Working Document – see extracts below.  

With elections to the European Parliament just two weeks away, the understandable loss of trust in the EU’s political system could produce a citizen backlash that threatens the future of the EU itself. That would be the cruellest twist of the financiers’ knife if the economic gains of 60 years of integration were put at risk.

The numbers who would then be thrown out of work or impoverished would be a great deal more than the 16 million souls who have suffered that fate in the last five years. Financial market participants will count the readily-measurable costs of changing their accounting system and the like and then consider how much of such costs will come out of their bonuses. But they should pause to consider the broader consequences of their actions in recent years and perhaps be grateful that a safer system will still allow many opportunities to operate “a financial system  that serves the economy and contributes to sustainable growth”: the overarching objective of the reform process.

 

Graham Bishop - Consultant on EU Integration - Political, Financial, Economic, Budgetary

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9 May 2014

Europe Day blog: Euro area poised to deepen its integration – profound change ahead for EU financial markets

Europe Day is a good moment to reflect on the progress of the European Union since the Schuman Declaration 65 years ago that triggered the process of “ever-closer union”.  Direct elections to the Eighth European Parliament will take place shortly – and coincide with planned elections in the Ukraine. The cosy blanket of complete security that has settled on Europe since the 1989 fall of the Berlin Wall and dissolution of the USSR has suddenly been pierced. Whether it is to be ripped apart entirely is not yet clear. For Russia, the stakes cannot be higher – playing economic hard-ball with a neighbouring Union that is both ten times your size and the biggest customer for your major exports is a dangerous game – but one which is more likely to be apparent on a five-year horizon than the media’s usual five–day view. The co-incidence of the two elections may persuade rather more EU electors to exercise their freedom than otherwise.

The euro area is integrating ever more deeply. The next five-year term of the European Parliament and Commission may see a step change in the recognition of the implications of the measures already agreed. These may have a profound effect on many aspects of securities markets:

·         The economic policies that drive the shape of the yield curve;

·         Credit spreads of governments;

·         The nature and scale of market finance that must replace much bank funding of the economy;

·         The regulatory response to these economic forces – especially on sovereign debt;

·         The size, structure and riskiness of Europe’s banks and insurers

I will continue to analyse the implications of political, financial, economic and budgetary integration – as well as continue to argue that eurobills should be seen as another excellent step along the road to a genuine economic and monetary union. The outline of my detailed proposal for a Temporary Eurobill Fund is here.

Graham Bishop - Consultant on EU Integration - Political, Financial, Economic, Budgetary

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8 May 2014

Graham's selection of key `integration' events in April included:

Political: In three weeks, the European Parliament elections will be done – but could the result yet be tipped by the Russian impact on the simultaneous Ukraine polls re-awakening the basic fears that created the EU in the first place?

Financial: The European Commission’s Expert Group on DRFs and Eurobills presented its report to ECONand Graham Bishop explained his plan for a Temporary Eurobill Fund.

The European Parliament and Council agreed a string of major legislation on banking union and financial market reform. Efforts to boost securitisation were reinforced by the ECB and Bank of England. Full details of the AQR, Comprehensive Assessment and Stress Tests were published.

Economic:All three major international forecasters (Commission/OECD/IMF) agree that Europe/eurozone is on a path to economic growth, especially for programme. A thoughtful analysis of communicating monetary policy by ECB President Draghi underlined the risk of further impairment of monetary policy channels that might require unconventional responses. 

Member States:More evidence from the City that 'Brexit' would be very damaging to the UK – and also to the EU. The new French Government’s hints about taking longer to control its budget deficit immediately ran into trouble from Europe – underlining concerns about France’s policies. 

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16 April 2014

Brussels for Breakfast (98) with Graham Bishop and Nickolas Reinhardt (Afore Consulting)

Yesterday’s Brussels4Breakfast meeting was dominated by the topical discussion of the imminent European elections and next European Commission. It was generally agreed that the election outcome would depend heavily on voter turnout across Europe, with the polls at the moment predicting a fairly symmetrical parliament for the first time in its history. It was pointed out that the 15-20 per cent of extremists predicted to be elected on the right/left would be relatively insignificant to financial services as the main parties would be forced to cooperate in order to build majorities.

A further subject of discussion was the future committee structure of the EP, notably the idea to split the ECON committee into a main and a sub-committee, one of them charged with macroprudential and one with micropudential issues. The EPP, currently leading in the polls by a slight margin and hence probably chairing the ECON committee is said to be against such a split. Committee compositions will be decided in July.

In terms of the future Commission President, opinions differed: A stand-off between the two main political parties and European governments was deemed unlikely, yet both the left and the right would each have, according to all polls, less than half of the votes in the new parliament. The Liberals (ALDE) might therefor either be the decisive force to decide on the new Commission President, or their candidate might become a “compromise candidate” after all. In this context the resignation of Jyrki Katainen as Finnish PM was mentioned as well as Pierre Moscovici’s nomination to become the next French commissioner. The recently talked-about Super-commissioner model seemed off the table.

In the more technical part of the morning, an overarching theme was the revived talk of securitisation. Barnier mentioned this in his speech at Eurofi, the BoE and ECB published a joint paper on “The impaired EU securitisation market: causes, roadblocks and how to deal with them” and the EBF, InsuranceEurope and TheCityUK all welcomed these developments in recent statements. In a recent speech, Yves Mersch from the ECB said there was “a need to restore coherence across financial sectors in particular amid the unfavourable regulatory treatment of (high quality) securitisation instruments”.

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14 April 2014

Greece: This is NOT the moment to default

Greece has just made a major step forward in its recovery by obtaining  a modest amount of funding from the international capital markets. The improved economic fundamentals provided the springboard and the FT's Munchau is right that achieving durable primary and current account surpluses have always been the prerequisite for Greece to contemplate default. (link to FT article) But doing it now/soon???

The calculus is far more complex than basic economics in the modern world of the European Union, a less predictable Turkey and a flexing of Russian muscles:

·         The EU would be entitled to feel betrayed by a default explicitly targeted at the help that it has given. There could be no co-operation on `leaving the euro but staying in the EU itself’ via legal gymnastics as the Treaty formally does not allow a state to exit the euro – except by leaving the EU.  An EU exit would incur massive costs from the loss of structural funds and other subsidies, quite part from the difficulties for the tourist trade of passport formalities for the 85% of travellers returning to the EU. Moreover, the EU would hardly regard such a state as a reliable partner as a transit route for natural gas supplies from the Middle East.

·         The recent difficulties in Turkey might historically have triggered enhanced Greek defence expenditures but these excesses have been trimmed massively by the bail-out conditions and an immediate build up would simply return the country to financial difficulties again. Part of the calculus has been that Turkey’s EU membership aspirations would act as a brake on aggression towards Greece. Outside the EU and in disgrace, that constraint would be removed.

·         Russian actions in Crimea have triggered a great deal of nervousness in many of its neighbours to its west. Several states have suddenly reviewed plans to join the euro as a mechanism to bind themselves ever more closely into the inner core of the EU.

On all counts, it would be short-sighted indeed for Greece to seize the first plausible opportunity to go in the opposite direction.

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4 April 2014

Moving the TEF forward: Reactions to the Expert Group Report

Many observers (including MEPs) expressed their disappointment with the absence of clear-cut conclusions in the Report. But our mandate was explicit: “The Group will be tasked to thoroughly assess….” and not to produce any recommendations. Our mandate foresaw that “The required deeper integration of financial regulation, fiscal and economic policy and corresponding instruments must be accompanied by commensurate political integration, ensuring democratic legitimacy and accountability.”

Even since our appointment, there has been a further rise in the risk of substantial numbers of Eurosceptics being elected in just six weeks’ time to the European Parliament. As a result, even in Britain, Europe is a topic of public discussion in a way that it has not been for decades. So the result of the election may have a far-reaching implication for the development of Europe as it will be seen as a popular mandate for action – or not. Opinion polls suggest that the three largest parties in the Seventh Parliament – all favouring more integration – will actually increase their representation to about 64% of members of the Eighth Parliament. President Barroso’s call to wait for the people’s verdict before thinking about eurobills may get a positive response.

German Finance Minister Schäuble spoke in Bruges last week and called for a change in the Treaty in the “medium term” to underpin greater integration – echoing the repeated statements of Chancellor Merkel.

·         If such a change were to happen, that would be a convenient moment to add in a mechanism to prohibit part of participants’ financial sovereignty – issuing under two-year debt. Such a prohibition would clearly be outside the 'co-ordination' functions currently permitted by the TFEU and require an Inter- Governmental Agreement until the TFEU can be changed.

·         Schäuble also warned against the risks of debt mutualisation and the Expert Group certainly pointed out the difficulties of mutualisation with `joint and several’ guarantees. But the Report was careful to leave the way open to an ESM-style model based on limited, callable capital. That is the model that I have advocated in my evidence to ECON for a Temporary Eurobill Fund (TEF) here.  

If the TEF existed – and it could be issuing within a year – then the decision-makers (in practice, the Finance Ministers) could instruct the managers to buy-in say all under two-year debt of the participating governments. As a result, they would purchase more than half of all the securities that the ECB might think of buying under its OMT programme. Moreover, the TEF’s bills would be ideal assets for the ECB to buy if it decides to do QE.

I commend this plan to the new Parliament and Commission for swift action in their term.

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1 April 2014

• Judging by the questioning from MEPs, this ECON feels quite proprietorial about the Group’s work as it was only set up at their insistence. Having heard that steps can be taken quickly, I can imagine that the Parliament will push the Commission for a policy follow-up later this year.
• A Temporary Eurobill Fund (TEF) seems a step closer now – with all its implications for greater European integration, financial markets and their structure.

This afternoon, ECON devoted two hours to analysing the Expert Group’s Report. My personal statement to the Committee is here and it includes the brief details of how the plan for a Temporary Eurobill Fund (TEF) would work. Earlier papers contain more details of the concept but the Expert Group has helped me refine the ideas very substantially and create an operational legal framework.

The Group laid out sound reasons why action is in the general interest of all EMU participants today; the objectives of joint issuance; and the risk of moral hazard. However, we should be under no illusions about the existence of moral hazard amongst the nations of Europe. The 1957 Treaty of Rome inter-linked the economies, the 1987 Single Market Act was probably the point of no-return and if not, the 1999 introduction of the single currency certainly was. The 2010 Greek crisis demonstrated the reality of the existing moral hazard and the subsequent revolution in economic governance processes illustrates the magnitude of the euro area’s attempt to manage the risk. The ESM simply calibrates the financial risks already involved when things go wrong.

My plan for a Temporary Eurobill Fund is a financial complement to the economic governance measures that are trying to control the direct economic risk. If a state fails to manage its economy in a sustainable way, there will be financial spill-overs in a `single financial market’ - as the natural result of the economic failure rather than any attempts by fellow euro area members to minimise their direct financial exposure.

Naturally market participants have a view about the arrangements that will be ideal for them, but Parliaments must - absolutely properly - protect the long-run interests of their electors. The art of the possible is to find an acceptable 'middle way'. So I discussed the aspects of the Group's analysis that illuminate how a TEF could provide such a middle way.

“I believe that a plan along the lines of the Temporary Eurobill Fund (TEF) is completely feasible - both as a simple insurance policy against future storms that remain all too likely, and as a series of small, but reversible, steps towards deeper integration.”

Next Steps – after the Report and ECON Hearing

In my view, it is “appropriate for the Commission to make proposals before the end of its mandate”. However, being realistic about the remaining life of this Commission and the inter-governmental nature of a key part of the proposal, perhaps this Seventh European Parliament should pass on a call for a Temporary Eurobill Fund to be part of the report that the two Presidents – van Rompuy and Barroso – are tasked with delivering to the October European Council.  

Judging by the questioning from MEPs, this ECON feels quite proprietorial about the Group’s work as it was only set up at their insistence. Having heard that steps can be taken quickly, I can imagine that the Parliament will push the Commission for a policy follow-up later this year. Part of that must be a clear elaboration of the legal reasons why an inter-governmental agreement is needed as it was easy to pick up the concerns about the way the Single Resolution Fund had come into existence.

But President Barroso was absolutely correct to say – in his response to the Group’s Report that “The Commission will carefully study the report and decide how to follow it up in due course. But before we do, we need to have a democratic debate on these ideas with citizens, governments and the European Parliament. The upcoming European elections are a prime opportunity to discuss what kind of Union we really want."

So the first step is for the people of Europe to send the signal – by their votes in the Parliament election – that they wish to continue down the integration road. Then the next Commission can develop a fully–fledged plan – under the auspices of the Eighth Parliament – and be ready to launch it if conditions are right.

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31 March 2014

Final Report of European Commission “Expert Group on Debt Redemption Fund and Eurobills”

The Expert Group was set up last June link with a specific mandate to analyse the possibilities, rather than come forward with a recommendation.  Graham Bishop was honoured to be part of this Group and our overall conclusion was:

“Both a DRF/P and eurobills would have merits in stabilising government debt markets, supporting monetary policy transmission, promoting financial stability and integration, although in different ways and with different long term implications. These merits are coupled with economic, financial and moral hazard risks, and the trade-offs depend on various design options. Given the very limited experience with the EU’s reformed economic governance, it may be considered prudent to first collect evidence on the efficiency of that governance before any decisions on schemes of joint issuance are taken. Without EU Treaty amendments, joint issuance schemes could be established only in a pro rata form, and - at least for the DRF/P - only through a purely intergovernmental construction raising democratic accountability issues. Treaty amendments would be necessary to arrive at joint issuance schemes including joint and several liability, certain forms of protection against moral hazard and appropriate attention to democratic legitimacy.”

The full Report is here: link

In response, President Barroso said “The Commission will carefully study the report and decide how to follow it up in due course. But before we do, we need to have a democratic debate on these ideas with citizens, governments and the European Parliament. The upcoming European elections are a prime opportunity to discuss what kind of Union we really want."

The Press Release from the European Commission about the Report is here: link

The Group was set up at the explicit request of the European Parliament and ECON will hold a public hearing on the Report tomorrow link and the debate will start.

This will be web-streamed so you can follow the debate live - link.

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20th March 2014

SRM deal seems to be done  -

just got to wait until about 10AM for the EP group leaders to agree. After record breaking 16 hours of negotiations! But cannot wait to see the details as must leave to get Eurostar back from Brussels... Congratualtions to the Parliament for toughing it out to get a deal that may preserve the EU in another banking crisis.

But this whole process has to be reflected upon as it is not a good way of making law on vital issues. However, the Parliament's apparent success may be another pivotal moment in the shift of power between the Member States and the euro area.  Time for reflection later.

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18th March 2014

SRM – Deal Cobbled Together?

The SRM decision is coming about in a very unsatisfactory way for a matter that is said by all concerned to be crucial to the continuing stability of the euro. What is all the sound and fury actually about? In reality, the Commission already controls bank resolution until the SRM comes into force to the extent that any state aid is involved – and that function continues. So what will actually change - in all probability - for any significant cases? The complexity of the proposal, and the rush, is a bad way to make law but it can still be done – and then the scheduled review in 2016 can sweep up any nasty failings that do crystallise in the interim. 

Bloomberg reported German Finance Minister Schäuble as saying “I can say the European Parliament has to make a lot of moves, otherwise we will not get a decision …and then we will have no regulation". Council has given the Greek Presidency some latitude in negotiations but there is little evidence yet that it has given sufficient. The pressure on the negotiators is being ratcheted up by the deadline of the Parliament’s dissolution, but several factors should be put into the equation of whether a deal should be done tomorrow:

• The run of reports about banks raising capital, passing national stress tests, etc. continues unabated. Though the losses now being reported look daunting, the shares seem to go up afterwards so bank shareholders continue their insouciance about the risk of the 'huge losses' that seem to haunt the politicians. If shareholders are right, the risk of major resolutions is quite modest.

• Last August, the Commission amended State aid crisis rules for banks. In principle, a bank needs to work out a restructuring plan, including a capital raising plan, which convincingly demonstrates how it will become profitable in the long term before it can receive recapitalisation measures. If the viability of the bank cannot be restored, an orderly winding down plan needs to be submitted instead. This announcement did not generate much political heat at the time but in practice is very far-reaching, as it changed instantly the ability of governments to contribute to the re-capitalisation of banks.

Normally this is a crucial element of a rescue plan so, in reality, the Commission controls bank resolution until the SRM comes into force. In fact, the Commission proposal explicitly states that “the State aid competences of the Commission will be preserved in all resolution cases involving support which qualifies as State aid". If there are any major bank resolutions in the near future, it is almost inevitable that State aid will have a role until 'bail-in’ comes into force in 2016. So the Commission will run the procedure anyway. This could deal with the Parliament’s wish to have a Union body run the resolution process. The Parliament called for this to be the ECB but the Commission formally taking the decision should be acceptable as there will be no problem of delegated powers being challenged (under the famous Meroni doctrine)

• Finally, the proposal calls for a complete “review by 31 December 2016, and subsequently every five years thereafter, the Commission shall publish a report on the application of this Regulation, with a special emphasis on monitoring the potential impact on the smooth functioning of the internal market". Assuming the AQR does not reveal a swathe of banks that need resolution during 2015, the SRM may hardly be used except for small banks.

If the detractors of the complex procedure turn out to be right, then the SRM will be subject to a root and branch review almost immediately.  With the benefit of hindsight, a calmer approach should result in a much improved, and thus credible, mechanism. So perhaps Parliament should hold its nose and let this through tomorrow.

More for Graham Bishop clients - link

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14th March 2014

In recent days and weeks, the British political class (aided and abetted by the Westminster media bubble) has shown an amazing ability to continue stubbornly ignoring the implications of key messages from the mainland. Next week is the UK’s “Budget”. Will that be the opportunity to tackle economic problems as vigorously as the euro area has done?  With an election in 14 months – the answer is obvious!

Eventually, financial markets will wake up to Britain’s economic weakness flowing from the double deficits in the government’s finances and foreign trade – exacerbated by political marginalisation in Europe.

The British political class seems determined to avoid recognising that the euro area is set to expand further in the next few years – cementing the range of common interests and thus political integration. The arithmetic of voting weights will shift the balance of power to the euro area and away from Britain – amounting to a de facto shift in power even if it is not de jure. At some stage, the political class will have to explain to the people of `Great’ Britain how they became comprehensively marginalised - without a popular vote but with massive consequences.

More for Graham Bishop clients: link

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12th March 2014

SRM talks on verge of failure after trialogue - final try next week

Trialogue with Barnier and Greek Presidency/Eurogroup fails to agree - again. Bloomberg reports “I can say the European Parliament has to make a lot of move, otherwise we will not get a decision,” German Finance Minister Wolfgang Schaeuble said during yesterday’s talks. “And then we will have no regulation.” At least they started with smiles and goodwill (video link). But there is little evidence that Council has given the Greek Presidency much latitude.

However, the run of reports about banks raising capital, passing national stress tests etc continues unabated. Though the losses now being reported look daunting, the shares seem to go up afterwards so bank shareholders continue their insouciance about the risk of the `huge losses' that seem to haunt the politicians. Maybe it would not be so bad to wait a year for a thoroughly thought through SRM that is designed after any AQR problems are known. In any case, DG Competition will have to deal with any state aid issues before the SRM is in force so what is all the sound and fury actually about? Might be best to allow  a breathing space for Council to have a fundamental re-think.

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10th March 2014

Stating the obvious: FT's Münchau says "national interests undermine Europe" - but he has a point!

The easy assumption that fear of war disappeared in Europe with the Berlin Wall is being challenged by Putin’s actions but what can the EU do about it?  It is NOT a single state – and really is just a collection of 28 sovereign states that choose to act together on specific topics agreed already in “the Treaty”.  The rest of the time they are all over the place – until they realise it is collectively damaging and gradually do something about it – example: monetary union.

The EU may be an 'economic colossus but political pygmy’ and Münchau rightly lambasts the failure to create a single EU market for energy. But Russia may come to regret tweaking the colossus’ tail too often. The EU’s population is nearly four times that of Russia but its economy is an amazing ten times the size of Russia’s oil- and gas-dominated economy. It can decide (albeit reluctantly) to endure some economic pain and reduce its dependency on Russia. Once done, there will be no going back. (In 1980, there were 250K coalminers in the UK who went on strike once too often. A decade later there were just 50K miners, and virtually none today.)

As Münchau points out, “Mr Putin has unwittingly given pro-Europeans their most powerful campaign argument for the upcoming European elections…” Little wonder the rouble is down 10% against the euro in two months!

7th March 2014

SRM: Final act (for 2014 at least) probably at ECOFIN on Monday

The European Parliament has thrown down the gauntlet to the Council by tabling the resolution that it intends to debate in the final plenary session before dissolution. The EP challenges in particular the need for an Intergovernmental Agreement on the Resolution Fund. Ministers start talking about that at 19.00 on Monday. Could be a long night.

BUT shareholders in the EU’s biggest banks – first in line for a bail-in – clearly do not expect any major hit – judged by the continuing bull market in bank shares. The Parliament should stick to its guns as any need for a major resolution in the near future will almost certainly fall under existing state aid rules - as I have said for months!.

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25th February 2014

Cameron + Merkel = Treaty Change + 'Contractual Arrangements'??

The plushest of red carpets is being rolled out by the UK for Chancellor Merkel on 27^th February – everything short of a full State Visit. What does the UK want out of this visit and might it be given? The critical issue is “Treaty change”. Without this, Prime Minister Cameron’s entire political strategy of a 2017 referendum on EU membership would fall flat as there would not be a Treaty change to accept or reject – so no referendum!

Is Chancellor Merkel willing to contemplate Treaty change? The answer is: Yes. So 2 out of 28 EU leaders currently want “Treaty change”, but do they want the same thing? Chancellor Merkel is clear that she wants “contractual arrangements” and the UK could help….  Paradoxically, for the British people, the price of Cameron placating the euro-sceptics would be a UK vote to stay in the EU whilst, simultaneously, effectively leaving it.

More for Graham Bishop clients: link

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14th February 2014

House of Lords Report on "Genuine Economic and Monetary Union"

My comment: An excellent report that highlights the key issue of the UK remaining fully involved with EU policy-making in the financial services field. Rightly, the Committee is looking forward to the end-March report of the Commission’s Expert Group on Redemption Funds and Eurobills to clarify the issues around debt `mutualisation’. This has taken on renewed urgency now that doubts have appeared about OMTs - and eurobills are not so `politically remote’. (Graham Bishop is a member of this Expert Group).

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The report, entitled ‘Genuine Economic and Monetary Union’ and the implications for the UK also calls on the UK Government to get strongly involved in the plans. As the eurozone moves towards closer integration the UK will need to work hard to influence the debate, which it needs to do for its own good, for the good of the City of London, and the good of all 28 members of the EU. link

Findings

Other findings of the report include:

• Banking Union is vital to the success of the EU plans, but the proposed resolution mechanism for dealing with failing banks is not fit for purpose.

• Financial stability can only be achieved through a common deposit guarantee scheme, but these plans are dead in the water

• Without a workable banking union, the vicious circle linking bank debt and sovereign debt will not be broken.

• Although politically remote, the eurozone's safety could require both debt mutualisation and a system of financial transfers.

• The Committee welcomes the decisive action taken by the European Central Bank to tackle the eurozone crisis, but warns that its credibility as bank supervisor must not be jeopardised as it undertakes its comprehensive assessment of the banking system.

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10 February 2014

Few observers feel the euro crisis is over as elevated debt levels leave many euro area members vulnerable to some sort of economic or political accident. Political risk may be the most difficult to deal with. An election result could trigger a market reaction that will force interest rates to 'unsustainable’ levels well before the economic policies feared by the markets are implemented and then go on to result in the forecast economic problem.

Most commentaries on the Karlsruhe decision focus on the constitutional implications of EU 'primary law’ – the EU Treaties - taking precedence over the German constitution. The German Constitutional Court has asked for clarification about whether the ECB is acting within its powers in creating OMTs. But this overlooks the practical mechanics of the process of launching an OMT – a process that requires a euro area political decision by the ESM’s Board of Governors – whose day-job is Finance Minister of their state. The ESM can only be deployed when it is “indispensable to safeguard the stability of the euro area as a whole”.

Would a political risk that has yet to produce any adverse economic developments qualify? Would German 'skeptics’ challenge it? Of course they would! And this is before the ECB even starts to thinks about an intervention that is more political than economic, let alone monetary. Perhaps a eurobill programme – such as the Temporary Eurobill Fund (TEF) advocated by this author – would be a better way of buying some time for such a crisis to cool.

• More shortly for Graham Bishop clients in the forthcoming European Integration Monitor

• Latest Summary of the TEF Link

NOTE: Graham Bishop will update the TEF proposal in the light of the Report of Expert Group on Debt Redemption Funds and Eurobills link. The Group is mandated to report before the end of March.

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22 January 2014

 

Financial Services: Balance of EU Competences Review by HM Treasury Link

On 16 January, Graham Bishop submitted a response on behalf of the European Movement (UK) link. The extracts below from the questions and answers give a flavour of the depth of HM Treasury’s review. The full submission is available here. The central message is that the UK must step forward to regain its influence in one of the world’s largest financial markets. In short, we must `get real’!

2 How might the UK benefit from more or less EU action? The best chance of reform probably lies in taking decisions for the public good well away from local `regulatory capture’.

3 How have EU rules helped …? At the macro-economic level rather than financial services, the EU has made revolutionary changes to its economic governance structure since 2010. In the financial services field and crucially in banking, the rule changes are still a work in progress

4 Is the volume and detail of EU rule-making in financial services pitched at the right level? The dramatic rise in the volume of measures – as well as the enormous increase in the length of the documents – is the logical corollary of moving regulation progressively to the European level.

5 How has the EU’s approach to Third Country access affected the ability of UK firms and markets to trade internationally? The bargaining power that flows from having the world’s largest single market should not be underestimated. The UK as a stand-alone negotiator would have little chance of achieving anything once the US Congress has decided its rules.

6 Do you think that more or less EU-level regulation in the area of retail financial services would bring benefits to consumers? After the colossal, sustained failure of UK-level regulation to protect British consumers from waves of rapacious mis-selling, it is difficult to foresee anything worse from EU rules.

7 What has been the impact of the shift towards regulation and supervision at the EU level..?  The concept of a single market – as regularly extolled by the Chancellor of the Exchequer – logically requires a single set of rules that are uniformly enforced. Only then can a firm seeking to do business anywhere in the EU be sure of equal treatment.

8 Does the UK have an appropriate level of influence on EU legislation in financial services? I have the strong perception that UK influence is rapidly slipping away as the political debate in the UK is widely read on the other side of the Channel as a prelude to the UK leaving the EU. The European Parliament has already indicated that it will set up an EMU area sub-Committee.

9 How effective and accountable is the EU policy-making process on financial services legislation..? The formal process may well be respected, but the result is not a proper scrutiny of legislative proposals when perhaps 2000 amendments must be considered. However, the original sin was not in the legislatures of the EU (or US) but in the financial services industry that let society down so comprehensively that a massive change in scope and detail of almost every item of financial legislation became necessary.

11 What may be the impact of future challenges and opportunities for the UK..? The natural result of a wide banking union soon - and a euro area that steadily broadens to match the contours of that banking union – is that the rules will be set increasingly at the level of that group to maximise the common good for their 450 million citizens.

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20 January 2014

European Integration Monitor – some key points looking back to last month

Politics

• Voter concerns about the EU level economy are diminishing rapidly - down by a third from the peak – so economic developments may take some of the wind out of the sails of the ‘euro-antis’.
• UK footnote: more comments that Cameron’s negotiating position is wishful thinking; increasingly likely that British sovereignty – epitomised in the banking union voting arrangements – actually hangs on the internal coalition squabbles of some small states.

Finance

• Big Success for Lithuanian Presidency: Five pieces of financial services legislation ‘in the bag’ in last days of Presidency – BRRD; DGS; MAD (creating the first EU level criminal offences); Reform of Audit and CSD.

Economics

•  Linking pension benefits to longevity can nearly halve the costs.
• Six Pack and Two Pack get underway: Council agrees to launch 16 in-depth reviews and give opinions on 5 progress reports.
• Commission VP Rehn highlighted the smaller fiscal consolidation effort needed in 2014, and the “extraordinary Eurogroup meeting where ministers discussed about each other’s budgets with rigour and in a true spirit of partnership”.

Budgets   

• Parliament starts to examine the Troika process.
• Unambiguous good news from Spain; Ireland; Cyprus. Portugal – broadly on track. : Greece – does just enough to get the “second sub-tranche of the fifth instalment”.

More for Graham Bishop clients: link

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15 January 2014

Chancellor Osborne's speech to the Open Europe Conference: Graham Bishop commentary

"First we need economic reform that enables the EU to create jobs and economic security, and compete in the global race - something it is not doing well at the moment." Six Pack/Two Pack/TSCG/European Semester /CSR is all about this. Has he read and understood them??

By May 2015, Chancellor Osborne may have discovered that his example of a 'double majority' on Banking Union has come back to haunt him and he has to propose the UK leaves the EU – or eat a lot of these words. But Johnny Foreigner may have noticed the soaring current account deficit before then.

More for Graham Bishop clients link

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14 January 2014

B4B 95 at the BBA this morning

Graham joined CSFI at the BBA to host our 95th monthly roundtable discussion on the developments in Financial Services Regulation.

• Despite reports in December that a political agreement had been reached in trialogue negotiations on the Central Securities Depositories (CSD) Regulation, it was clarified that the technical details would require much more attention so final results are not expected before informal tripartite meetings in late March.

• Several points were made about the ongoing negotiations with the Single Resolution Mechanism (SRM). Despite Mario Draghi saying in December that “we should not create a Single Resolution Mechanism that is single in name only”, those present agreed that the final decision-making process could well turn out to be "clunky" as, according to the Treaty, only the Council or the Commission could be given the authority to make resolution decisions, not the Single Resolution Board. This would inevitably mean that dozens (perhaps more than a hundred) of people will be involved in each resolution case, making the procedure complex and, in Draghi’s words, “cumbersome”.

• The euro area states committed to finalise an intergovernmental treaty on the Single Resolution Fund by 1 March. However, EP President Schulz said in a speech on 19 December that “we [the EP] wish the community method to provide the legal basis for the Banking Union and also for the resolution fund. We reject the idea of a further intergovernmental treaty”. This was seen by some as an indication that the SRM discussions might turn into a political battle that would be without an immediate solution, given the end of both the Parliament’s and Commission’s terms of office. However, others expressed confidence that a compromise would be reached in the interest of European financial markets - given the crucial issue of trust in the resolution process that was needed to complement the “cranky” decision-making process.

• The EU needs to continue shaping the debate at the Basel Committee on Banking Supervision (BCBS), even though the Commission will soon wind down for its changeover in the autumn. It was suggested that the dynamic within the Federal Reserve might well change and the US might take a more vigorous approach at Basel.

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8 January 2014

Welcome to the 2014 Timeline and Happy New Year

I have spent much of the `holiday’ drafting my next book setting out my formal proposal for a Temporary Eurobill Fund (TEF). I shall aim to publish that after the Expert Group on DRF and Eurobills meets its mandate deadline and produces our report in March.

However, it did make me realise what a big year 2014 is going to be in so many ways. By the end of 2014, the EU will have a new Commission, a new Parliament and further economic integration of the euro area coupled with an effective banking union (even if it is not as complete as many had hoped). The May elections to the European Parliament could well turn out to be something of a plebiscite on the conduct of the crisis, and the result in the UK may have sent a strong signal about the chances of the UK remain a member of the EU.

So I have also drafted a Timeline for the events that will unfold in the political, financial, economic and budgetary fields. The format enables us to keep a rolling review of up-coming events along the 2014 Timeline. Please contact me if you would like to know more about this new product:  graham@grahambishop.com.

Graham Bishop clients: more

Graham Bishop - Consultant on EU Integration - Political, Financial, Economic, Budgetary