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Overview
Exactly sixty years ago, French foreign minister Schuman made his famous Declaration “Europe will not be made all at once, or according to a single plan. It will be built through concrete achievements which first create a de facto solidarity…” The “concrete achievements” since then include the creation of a single market in 1992 and then the introduction of the euro as the single currency for most EU members in 1999. When financial commentators talk glibly about the possible disintegration of the euro, they may not be thinking deeply about the full implications if such a process were accompanied by a fracturing of this carefully nurtured relationship between France and Germany. There is an alternative outcome to a fracturing: could the crisis instead lead to a deepening of the relationship that would run well beyond France and Germany and include all members of the eurozone?
A frantic weekend of negotiations in mid-May concluded by announcing: "The Council and the Member States have decided today on a comprehensive package of measures to preserve financial stability in Europe…we have decided to establish a European stabilisation mechanism. The mechanism is based on … an intergovernmental agreement of euro area Member States. Its activation is subject to strong conditionality…euro area Member States stand ready to complement such resources … guaranteed on a pro rata basis by participating Member States … up to a volume of € 440 billion…..At the same time, the EU will urgently start working on the necessary reforms to complement the existing framework to ensure fiscal sustainability in the euro area..”
A watershed does seem to have been crossed as support was offered to Greece in return for a dramatic tightening of fiscal policy. Schuman’s “de facto solidarity” concept seems to have been fulfilled financially on this occasion but there is a clear price: economic “co-ordination” within the eurozone that will be toughened up substantially to stop this happening again.
The heart of the problem lies in the loss of competitiveness of some euro Members who were unwilling to recognise that removing the currency constraint meant they had to conduct a wide array of policies (for example on labour market flexibility) that matched their competitors in the euro area – quite apart from globally. All these policies will now be subject to “structured surveillance” by the eurozone – if the members accept the Commission proposals.
This intervention comes at a critical juncture for the debate on regulatory reform as the proposals derived from the De Larosière Group’s report are now about to be finalised. The Commission proposal would move some regulatory powers to the European level, but the ECOFIN Council – the Member States – cut these back radically. However, the new Lisbon Treaty in now in force and gives co-legislative powers to the European Parliament. Their committee (ECON) has just voted “to beef up the financial supervisory package - well beyond Council proposals”. Both Council and Parliament must agree an identical text for it to become law, so we now add in a constitutional clash as well as an economic and financial crisis.
Across the Atlantic, the US Senate passed Wall Street reform, but this now has to be married to the House version. Senator Dodd hailed the bill “For the first time ever we will have a Consumer Financial Protection Bureau to watch out for the average citizen in our country when they are abused by a financial market place that takes advantage of them on home mortgages and credit cards…we will have transparency and accountability for derivatives with mandatory clearing and exchange trading.…we will have a system in place, so that when a giant company fails, it fails, its management is fired, its shareholders and creditors are wiped out, and never again will taxpayers be forced to bail them out.…we will have an advance warning system, so somebody is on the lookout for the next big problem in the economy before it’s too late to do anything about it.”
The European Commission proposed that the EU establish an EU network of bank resolution funds to ensure that future bank failures are not at the cost of the taxpayer or destabilize the financial system. It will present these ideas at the G-20 Summit in Toronto. Such funds would form part of a broader framework aimed at preventing a future financial crisis and strengthening the financial system. The Commission believes that a way to achieve this is by introducing a requirement for Member States to establish funds according to common rules into which banks are required to pay a levy. The funds would not be used for bailing out or rescuing banks, but only to ensure that a bank's failure is managed in an orderly way and does not destabilise the financial system.
The Commission also had to react quickly to an unexpected German action in banning short sales of euro zone government bonds. Commissioner Barnier said that it plans "within a few weeks" to outline proposals on naked-shorting restrictions, disclosure of short positions and emergency powers for regulators. He believes “measures will be even more efficient if they are coordinated at European level.”
The Council agreed a mandate for negotiations with the European Parliament on AIFMD, aiming to adopt the directive in first reading. The presidency will negotiate on the basis of a Council general approach that took note of remaining concerns, for instance with respect to third country rules. The ECON committee voted on the same day and called for less speculation and more transparency. MEPs voted for new ways to deal with managers and funds located outside the EU, a proportionality system to regulate less risky funds more lightly, and rules on remuneration policies and short selling. However, the NAPF, IMA and AIMA wrote a joint letter to ECON appealing for support for a pragmatic and workable solution on non-EU alternative investment funds and managers. They argue the measure, in practice, will ban European investors from investing overseas. Moreover, they believe there is a real risk that it would provoke retaliatory action in non-EU jurisdictions, which would damage the European financial services industry and the whole European economy.
The IASB is proposing limited changes to the accounting for liabilities, with changes to the fair value option. The proposals respond to the view expressed by many investors and others in the extensive consultations that the IASB has undertaken—that volatility in profit or loss resulting from changes in the own-credit risk of liabilities that an entity chooses to measure at fair value is counter-intuitive and does not provide useful information to investors.