Progress?

UK Chancellor George Osborne yesterday refused to sign off the EU budget for 2009 in a routine vote in Brussels. This was a purely symbolic - but still important - gesture to protest wasteful spending in the EU. A spokesperson for the Treasury said that

The Chancellor has put Europe on notice that we can't afford not to put Europe's house in order.

The UK government is talking up EU budget reform, which can come back and bite them if they fail to deliver (remember the budget freeze promised by Cameron, which sort of back-fired?), but is also showing political will to get something done. That's a good sign.

Osborne was joined by Sweden and the Netherlands in abstaining in the vote. The reason for the Dutch absention was, as the country's Finance Ministry bluntly put it, that "€2 billion has disappeared" from the EU budget, which strikes us as a pretty valid reason.

Last year only the Netherlands abstained from the budget vote, meaning that we're looking at progress this year.

With this rate, all member states will refuse to sign off the annual budget by 2022 or 2016 (depending on how optimistically you count).

We're not exactly holding our breath though.

Different perceptions

This is from UK Chancellor George Osborne in today's FT:

The goal of a stronger banking system is so important that we must not allow unnecessary distractions in other areas to get in the way of agreement...Nor should we allow badly thought through regulation needlessly to undermine European competitiveness in financial services. Talk of competition between London, Paris and Frankfurt misses the point. It is the relative competitiveness of Europe, with London as its major financial hub, against other centres in Asia and America that is the real issue. No one should doubt that Britain is determined to remain a global financial centre serving Europe and the world.

And this is from a feature in FAZ (not online), looking at London as Europe's key financial centre:

the City of London has lost support from the British Government. Banks must fear overregulation from Brussels, particularly political decisions and a lack of skilled regulators in the EU’s new financial supervisors. That more than 1000 hedge fund managers have left the UK for Switzerland, is bearable, but that big institutions such as HSBC, Standard Chartered and Barclays are threatening to leave the City if future regulations harm them, is a big hit.

Not quite the same take on the issue...

Financial supervision: a gamble or a victory?

An article in yesterday’s Telegraph celebrated the ‘victory’ of George Osborne, who, it claimed, secured an agreement at yesterday’s ECOFIN meeting that one of the new pan-European financial regulators – the European Banking Authority (EBA) – will have its seat in London. The European Parliament has demanded that all three of the new supervisors be based in Frankfurt, and working under the auspices of a 'quasi-umbrella' organisation.

But is this really a victory? There was absolutely no way that member states were going to accept the EP's proposal to make Frankfurt the sole supervisory centre - it is politically impossible and MEPs know that. Remember, Germany already has the most important financial institution of them all, the ECB, and there's at least one francophone President who has no intention of allowing another key-institution be handed over to the Germans.

That is presumably why the French press also left aside the geography of the proposal, and focussed on the vital aspect: how much power that will be transferred from member states to these new authorities. Reuters France notes that,

the UK, under the pressure of its peers and of the European Parliament, has notably accepted the principle that the new European Supervisory Authorities for banks, markets and insurances will be able to address a financial institution directly – bypassing national supervisors – in emergency situations.

This is potentially huge as it will for the first time - via the EBA, ESMA and EIOPA (the three supervisors in question) - give the EU direct supervisory powers, with their decisions taking precedence over those of national supervisors. We knew that this would be the case for Credit Rating Agencies' EU operations (which kind of makes sense), but the UK now seems to have lost the plot on extending the scope beyond CRAs.

To be fair to Osborne, he's fighting the legacy of the previous UK government and his leverage is highly limited as this will all be decided by Qualified Majority.

As a 'concession' EU finance ministers agreed that the Council (rather than the Commission, as the Commission wants, or the new EU Systemic Risk Board, which the EP insists on) will determine when an “emergency situation” occurs. But this was always the Council's position. And as was made very clear at a debate Open Europe organised on the topic on Monday - there are few safeguards in place against this mechanism being misused or hijacked by political/ideological interests in the future. Crucially, the decision on whether to call an "emergency" will be taken by simple majority, meaning that the UK has exactly the same voting strength as everyone else (despite being home to the bulk of Europe's financial sector).

The potential pitfall ought to be obvious. Only a couple of months ago EU leaders used a clause in the Treaties (Article 122), designed for natural disasters and "exceptional occurrences beyond [member states']control" to make taxpayers in one country liable for the mistakes of a government in a different country, in a decision which involved majority vote (when it should have been unanimity), and which took the EU a huge step closer to a common bond (and fiscal federalism). Using Article 122 in this way was absolutely inconceivable when the Lisbon Treaty was discussed and ratified, particularly as the Treaties clearly and unequivocally prohibit bailouts (see here and here to get a feel for just how arbitrarily EU leaders used Article 122).

Give EU leaders "emergency powers" and they could well use them to justify the most dramatic and previously unthinkable measures. The recent ban on short-selling in Germany also ought to give an indication of how such measures stand the risk of being driven by politics rather than economic reality or long-term thinking.

There could be cases where strong and decisive action at the EU-level could be beneficial, but think about this: what exactly would the new EU supervisors have prevented in the financial crisis - given that the causes of the crisis were inherently global; a credit bubble in the US, global trade imbalances and so forth.

The new EU bodies will also be in charge of drawing up a 'single rule book' in the EU's financial services market and implementing uniform technical standards across Europe, overriding national authorities. This could actually benefit the City of London by ensuring the consistent implementation of directives and standards across the bloc, i.e. uniform application of UCITS IV so that fund managers can market their funds in all member states without additional barriers.

However, here there are also possible pitfalls. All of this assumes that the UK will actually write the single rulebook - which is a heroic assumption indeed (think the AIFM Directive). And as William Underhill, Chairman of the City of London Law Society's Company Law Committee, pointed out at Open Europe's debate:

What are the boundaries of the single EU rulebook that lies behind a lot of this new architecture?...The assumption is that the single rulebook in all circumstances justifies the change, whereas I think we still need to look at each specific proposal, each technical standard that comes forward needs to be justified against more subsidiarity principles.

In other words, the risk is that the EU, incrementally and over time, resorts to more interventions, in the name of a single rulebook.

So there are possible benefits, but it could also go in the completely opposite direction. A leader in today's Wall Street Journal describes the potential consequences:

One need not be conspiracy-minded or euroskeptic to see that more harmonization of regulation and supervision means less room for the U.K. to outcompete its rivals on the Continent. The transfer of power to the EU being negotiated this week in Brussels will, of necessity even if not by design, erode the U.K.'s competitive advantages in the financial sphere.

So this amounts to a pretty serious gamble. After all, the EU needs more safeguards against arbitrary government, not fewer.