04 June 2012

Paul N Goldschmidt: What on earth is the European Systemic Risk Council (ESRC) up to?

The de Larosière Report of February 2009, followed by the European Directives translating its main findings into Community law, had flagged the significant role assigned to the ESRC. Indeed, the depth of the crisis that followed the Lehman bankruptcy, whose systemic effects had been widely underestimated at the time, showed the flagrant lack of analytical and coordination tools needed for effective crisis prevention. The ESRC was meant to warn early on the relevant authorities (European Council, Parliament, Commission and the three new market Authorities) of latent systemic risks and offer non binding “recommendations” on which they should act or – if not – at least explain their decision.

Since the establishment of the ESRC, the least that can be said is that the banking and sovereign debt crisis within the Eurozone has acquired an indisputable “systemic” character. The recent calls by the Commission for the creation of a “banking union”, by the President of the ECB for “political” initiatives aimed at arming the EU/EMU with credible means of re-establishing confidence or the warning by Commissioner Olli Rehn of the risks of an implosion of the eurozone, as well as the fears of “contagion” expressed by experts and the erratic behaviour of financial markets, all constitute as many irrefutable proofs of this deplorable state of affairs.

Should one, therefore, be astonished by the silence of the ESRC or is it – unfortunately – the proof that it is its flawed structure that is the cause of its apparent paralysis? The deafening silence of the European Parliament, meant to be kept informed of its deliberations, is also surprising. On this point I take the liberty of annexing to this short article, two analytical papers written respectively in March and June 2009, in which I already pointed out the imbedded weaknesses in both the de Larosière and Commission proposals (please click on links below). They seem to me – quite to the contrary – to have lost absolutely nothing of their pertinence if one is to judge by the recent suggestions put forward by the Commission and numerous financial and political experts.

In the main, I drew attention to the lack of ambition in the proposals which recommended that essential regulatory and supervisory powers remain the prerogative of Member States, a factor currently widely recognised as inappropriate. I also pointed out the flawed structure of the ESRC, dominated by Central Bankers (with an inbuilt eurozone majority) which could be the source of conflicts of interest for Council Members and deprived the Institution of the advice of representatives of other relevant sectors. This puts President Draghi in a particularly difficult position who, while being a key actor in managing the crisis, is simultaneously tasked with presiding over the ESRC and with formulating recommendations that could be at variance with ECB monetary policy. Finally, I concluded that it was essential that the politicians and the citizens be informed of the choices confronting the EU so that no one could shelter – should a new crisis develop – behind the unquestioned authority of the authors of the de Larosière Report.

In the present context, it is urgent to take on board the structural impossibility of the ESRC to fulfil its mandate as defined. It is necessary to reform it in depth (along the lines developed in annex 2), taking inspiration from the structure chosen by the United States when it established a similar institution in the aftermath of the 2008 financial crisis.

Paul N Goldschmidt, Director, European Commission (ret.); Member of the Advisory Board of the Thomas More Institute

© Paul Goldschmidt