24 January 2012

Paul N Goldschmidt: Should the financial sector be branded as Public Enemy N° 1?

In his first important electoral speech, the French presidential candidate, François Hollande, clearly designated the “financial sector” as his main opponent. His audience gave a rapturous welcome to his proposals aiming at ending the “subjugation of the economy to the world of finance”.

Nobody contests that finance should be serving the economy rather than the reverse. It is, however, difficult to imagine that an ideologically-based “cracking down” is likely to improve financial services.

Nobody would contest either that the financial sector bears not only a significant (but not exclusive) share of responsibility in the financial crisis but that its image continues to be damaged by its unabashed arrogance. It creates emotional reactions, eagerly exploited by political actors, fuelling popular discontent and papering over their own failures and responsibilities (as governments, legislators or regulators).

Thus are propagated populist oversimplified catch-all slogans along the lines: exit the euro, ban bonuses, forbid short selling and CDS, tax speculation, bring rating agencies to heel, split commercial and investment banking, etc. Some of these ideas deserve careful consideration but only insofar as they form part of a broad-based approach allowing for a coherent articulation of the measures as well as an appropriate geographic extension of their applicability.

Creating a deep rift between the population and the world of finance is counterproductive because, on the morrow of the relief provided by all the loud barking, it will be necessary to rely on a well-functioning financial system capable of meeting the legitimate, necessary and complementary needs of enterprises, commerce, consumers, investors as well as of public authorities.

The heart of the problem resides in a confrontation in which the balance of power between protagonists is in fundamental disequilibrium: on the one hand the nebulous “globalised” world of finance which is dominated by a relatively limited number of large multinational actors, relying on a (more or less discreet) tightly knit network of personal relationships; on the other, public authorities whose powers are largely restricted to their national territories. The latter appear particularly timorous each time they are called to act in concert to confront the financial sector on which they have become inextricably dependent. The less-than-edifying spectacle offered by the “voluntary” PSI negotiations on the restructuring of the Greek sovereign debt is emblematic in this respect: the protagonists are engaged in a game of “chicken”, waving the spectre of a systemic breakdown and risking at any moment losing control over a highly volatile and dangerous situation.

It is within this context that one should evaluate the proposals of the French socialist candidate aiming at “taming” the world of finance. If one wishes to transcend a purely electoral posture, such a confrontation must necessarily be undertaken in close cooperation with all eurozone partners and, preferably, also with the UK. In particular, the negotiations must aim at further integration through the effective transfer of economic and fiscal powers (and means of control) to centralised authorities. This should allow reaching objectives such as the mutualisation of sovereign debt issuance or the granting of new responsibilities to the ECB as a quid pro quo for exercising the role of lender of last resort. It is only within such a framework that “the whole (EMU) shall be greater than the sum of its parts”, a necessary precondition allowing each of the signatories to reap the benefits that justify the unavoidable transfers of sovereignty.

A unilateral approach (whether promoted by François Hollande or President Sarkozy) has not the slightest chance of meeting the necessary conditions to tame the “financial beast” whose own mobility and flexibility arms it with forceful trump cards, skirting often close to outright blackmail, each time it finds itself opposed to purely national public authorities. One has witnessed the success of the British banking lobby imposing on HM Government the defence of parochial “City” interests or of the French banks making their Government the champion of the “universal banking” model. One should add the hardly-veiled threats of delocalisation raised each time new regulatory measures (fiscal or prudential) are proposed impinging on the competitivity (and profitability) of banks, thus paralysing the implementation of reforms whose pertinence are subject to a broad consensus.

Politics must, undoubtedly, seize once again the initiative from the all-too-powerful financial sector. This implies that the elector, who will be called to deliver an unambiguous mandate, be fully informed of the stakes which, clearly, stretch far beyond the national territory and the exclusive power of a President, however comfortable his political majority. The financial crisis can only be overcome within the framework of an integrated European Union, within which any claim by a candidate, a political party or even a single country to be able to impose unilaterally a solution is void of any credibility.

It is high time to mobilise and harness, for the common good, the financial world and its indisputable and indispensable power rather that to designate it – vaingloriously – as Public Enemy N° 1.

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

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E-mail: paul.goldschmidt@skynet.be                             Web: www.paulngoldschmidt.eu

© Paul Goldschmidt