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However, most market participants and commentators seem to overlook – or be completely unaware of – the other steps that the EU is taking to settle the longer term issues. Euro area Heads of Government continue to reiterate their commitment to “do whatever is necessary” and – to paraphrase Churchill – after they have exhausted all other possibilities, they still seem to be doing that.
For the EU as a whole, the June Summit signed off on the first “European Semester” exercise and the participants in the Euro Pact Plus pledged to do more next year. But the fundamental economic governance polices that will turn the Eurozone into a political union received scant attention from a media bent on soaking up the tear gas in Athens. Even the IMF’s Lipsky said the rules will have to be more intrusive and do a better job of shaping national policies. This means more automatic rules, implemented within tighter deadlines, and a greater say for the Commission in handling the Stability and Growth pact (SGP), the Excessive Deficit Procedure (EDP) and the new Excessive Imbalances Procedure.
Economic Governance Package of six proposals: Council has now offered seven significant concessions to Parliament and has already agreed to Reverse QMV in five out of six decisions where it is legally possible. But the remaining one is the key: the semi-automatic application of Commission proposals on policy changes and sanctions. Corien Wortmann Kool (EPP, NL), the MEP leading on this topic, insisted that the Commission must have more clout to keep Member States on the straight and narrow. "We must remember 2003 and 2005", she said, "when governments repeatedly helped each other to evade Commission warnings". She added: "We do not need to look at decision-making processes in three years' time, as suggested by the latest Council proposal. We already know that these processes are inadequate and need improving". Committee chair, Sharon Bowles (ALDE, UK), said “It has also been particularly aggravating to the Parliament that France and Germany, the two countries that weakened the stability and growth pact, joined forces to resist the very measure that would do most to prevent such future undermining."
However, without the support of the Socialist group, Parliament may not be able to muster an absolute majority of its members to sustain its eminently sensible position. In the midst of a crisis that stems directly from the unwillingness of the Members States to take strong action against fellow States with unsound policies, it seems extraordinary that France and Germany again lead those who seek to weaken discipline. This hardly seems consistent with the oft-repeated pledge to do whatever is necessary and is bordering on hypocrisy.
The fragility of Europe’s banking system has not yet been revealed as the EBA is said to have decided to delay the publication of results of its latest round of bank stress tests. Press reports suggest that that banks and their national supervisors submitted optimistic – or plain inaccurate - data. Indeed, Reuters reported that up to one in six European banks is set to fail the stress tests, with casualties expected in Germany, Greece, Portugal and Spain. However, strong comments from Jochen Sanio, head of BaFin, highlighted the unhappiness in Germany at the EBA’s approach to the tests. Commissioner Rehn said the tests will identify pockets of vulnerability in the banking system, and once identified, vulnerable banks must be either restructured and/or recapitalised. EU Member States have committed to putting remedial plans in place to that effect prior to the publication of the results. EBA Chairman Enria stressed that banking rules are to be overhauled as a result of the reform endorsed by the G20. This will provide an exceptional opportunity for giving life to the idea of the single rulebook, and produce a much more integrated regulatory framework in the Single Market.
Moving away from banking and into securities regulation, Commissioner Barnier said that more transparency and regulation on commodities and raw materials is needed. The proper functioning of commodities markets must be a priority at the highest political level internationally. It is also a political priority of the European Commission. The revision of the Market Abuse Directive will clearly define what constitutes market abuse in the case of commodity derivatives.
The bidding war in the world of stock exchanges took several turns: Deutsche Börse and NYSE Euronext finally sought approval from the European Commission thereby triggering the formal start of the anti-trust review process in Europe. But the London Stock Exchange had to terminate its proposed merger with Toronto as it seemed highly unlikely to achieve the required two-thirds majority approval. Downstream, Nasdaq OMX confirmed it has made a bid for a minority stake in LCH Clearnet, operator of the world's largest swaps clearing house. EuroCCP is set to slash the fees it charges trading firms, triggering competition in the post-trade sector when they are given the chance to choose their clearer for the first time.
The scale of collateral that will be required for these CCPS is beginning to emerge more clearly. The FT quoted a March report for the IMF that estimated that the overall OTC derivatives market was short of $2,000bn in collateral. Assuming about two-thirds of the OTC market moves to being cleared, clearing houses would require about $1,400bn in extra margin cover.
Commissioner Barnier hit back at criticism from insurance companies that new capital rules are too conservative, claiming that the changes are necessary to protect policyholders and improve an outdated regime. In a letter seen by the Financial Times, Commissioner Barnier, told four leading insurance industry bodies that “criticisms levied against Solvency II, particularly that calibrations are too high, have not been confirmed by evidence”.
Accounting problems continue to attract attention. The IASB announced the completion of its project to improve the accounting for pensions and other post-employment benefits by issuing an amended version of IAS 19 Employee Benefits. The revised standard is to remove two key features of existing pensions accounting standard - the use of expected return on assets, and corridor accounting options. The new standard also overhauls the rules on what must be disclosed in company accounts, with the intention of giving investors more information about the risks that companies run in their pension schemes.
"Gross or net? That is the question": as a member of IASB, Patricia McConnell pointed out that during IASB’s outreach activities it found there was no consensus among investors on the usefulness of presenting information about financial assets and financial liabilities on a gross basis or net basis in the balance sheet. Currently, differences between the IASB’s and the FASB’s offsetting requirements are the cause of the single largest difference in the amounts presented in the balance sheets of financial institutions.
The European Group of International Accounting Networks and Associations (EGIAN) published a paper supporting the robust reform programme for the EU audit profession and want to develop a fair system of audit that includes placing a limit on the market share of dominant audit firms; regular and fair tendering and curbing institutional bias in favour of the Big Four.
Graham Bishop