30 August 2002

The Convention on the Future of Europe

Are there Implications for Financial Regulation?
The Convention on the Future of Europe will be of lasting importance for the regulation of its financial system. Fundamental questions will be addressed in the context of this ‘constitutional’ debate. A move towards central financial regulation will not appear in the near future. The Declaration posed the question explicitly as to how to prevent a creeping expansion of the EU’s powers that would encroach on the nation states. The Convention will draw closer together responses to new economic and financial developments. The Enron debacle happened to come at a convenient moment for European policy-makers to consider the implications for the supervision of Europe’s financial system. The Commission is working with the Member States and the European Parliament to develop effective regulatory and supervisory structures at European level that will enable swift coordinated action in all financial services sectors. In the Longer Term a similar set of rules will be produced through application of the “Lamfalussy process” to all financial sectors.

SummaryThe Convention on the Future of Europe is a major step in the history of the European Union. The conclusions are likely to be of lasting importance in setting the constitutional framework for the European economy, and thus the regulation of its financial system. The answers to the questions as to whether the legislative process should be simplified and whether there should be more framework legislation, filled in by executive measures, will set the constitutional framework within which financial services regulation will develop.

June and July saw an intense round of discussions, reports, hearings and speeches on Financial Regulation. In part, this activity was sparked by the Enron debacle but that happened to come at a convenient moment for European policymakers to consider the implications for the supervision of Europe’s financial system in the context of the far-reaching constitutional debate thrown up by the Convention.

There does not appear to be any strong drive to change the existing approach. The Working Group on Economic Governance suggests that it will not propose any revolutionary changes to the distribution of powers. In particular the ECB is not likely to gain any power beyond its existing monetary powers, nor will the Eurogroup be formalised with the result that pressure to move towards central financial regulation will not appear.

In the Longer Term a constitutional document from the Convention will inevitably draw closer together responses to new economic and financial developments. The mechanics for this co-ordination are largely in place already - The Broad Economic Guidelines and the Stability Pact.

Growth of financial markets seems inevitable and will be achieved with a similar set of rules via the application of a “Lamfalussy process” to all financial sectors. In, perhaps, a decade, the then-existing legal structure may be similar enough in all Member States to enable a single European policy response to some presently unforeseeable financial disaster.

This, therefore, just leaves the problem of dealing with the unforeseeable crises of the future. Logic suggests that risk will have to be left to the policy-makers of the day!

Contents
Executive Summary

Introduction: What is the Convention about?

Part I: Aspects Relevant to EMU and, implicitly, to Financial Regulation
The Working Parties of the Convention

Part II: The June/July Debate on Financial Regulation
June 27- Draft Report by Economic and Monetary Affairs Committee (EMAC)
July 10 – Hearings by EMAC on Post-Enron issues
July 11 – Speech by Commissioner Bolkestein
July 12 – ECOFIN
July 19 - European Commission President Romano Prodi appoints a High-Level Study Group
July 23 – High-level exchange of views

Part III: The Implications of the Convention for Financial Regulation: an Assessment
The Near Term
But in the Longer Term


Figures
MANDATE OF THE CONVENTIONS WORKING PARTY
THE LAMFALUSSY-PROPOSAL IN THE CONTEXT OF BROADER CONSTITUTIONAL ISSUES
THE LAMFALUSSY-PROCESS: WHAT IT IS AND COULD IT SPREAD?
CONVENTION WORKING PARTY – CONCLUSION
ENRON HEARING IN PARLIAMENT
SPEECH BY COMMISSIONER BOLKESTEIN
RESULTS OF COUNCIL OF ECONOMICS AND FINANCE MINISTERS
PRODI APPOINTS HIGH-LEVEL STUDY GROUP
RESULTS OF HIGH-LEVEL EXCHANGE OF VIEWS ON FINANCIAL MARKETS

© Graham Bishop