Europe Nears Historic Agreement On Financial Supervision– With Plan Seen Going Farther Than U.S. Reform     Print

Today, European Union finance ministers reached landmark political consensus on sweeping financial supervisory reforms aimed at preventing a recurrence of the 2008 financial crisis.  In the plan, hailed as a breakthrough after months of inter-European negotiations, three new watchdog bodies with binding authority will be created: a European Banking Authority; a European Insurance and Occupational Pensions Authority and a European Securities and Markets Authority. In addition, a European Systemic Risk Board will be set up to monitor potential threats to the EU economy, to be chaired by the head of the European Central Bank. The finance ministers’ action follows last week’s provisional agreement between the European Parliament and the Belgian Presidency of the European Council, which augurs well for final passage when the Parliament formally votes on the measures September 22nd.

 Success in reaching a broad consensus across national frontiers on these measures is one reason for the wide praise that has greeted the accord’s progress.  “We have the foundation of a new European supervision,” said Michael Barnier, the EU’s Commissioner for the Internal Market. “It will give Europe the control tower and the radar screens needed to identify risks, the tools to better control financial players and the means to act quickly, in a coordinated way, in a timely fashion.”  Commissioner Barnier had given members of The European Institute an early preview of the thrust of these reforms last May during his first official visit to Washington since assuming his current position, and said that he hoped to see the changes go into effect by January 2011 – a deadline that now seems well within reach.

According to Vicky Ford, a conservative British member of the European Parliament, "the new structures will allow better coordination of financial services supervisors across Europe, thus protecting consumers from cross-border crises that we witnessed. At the same time national governments and national regulators keep their frontline responsibility to protect national tax payers' interests."

Germany's Finance Minister Wolfgang Schaeuble said that the accord shows the willingness of European countries to "put behind national interests for the sake of Europe.” He was echoed by Christine Lagarde, France's finance minister, who said that the agreement "shows Europe at its best."

Although, much remains to be settled about the actual workings of the new agencies, the exact wording of regulations to be put in place and the sharpness of some “enforcement teeth” that will be needed to back up the system, the agreement finely threads the balance between the powers of the new EU supervisory bodies and national sovereignty. Indeed, the new proposal stipulates three situations or “agreed scenarios” that could trigger intervention by the EU bodies: 1) when a national supervisory body violates EU law; 2) when national regulatory authorities disagree; and 3) when member states declare an “emergency.”  On this last question – who has the power to decide that a banking emergency exists – the EU’s Council of Ministers, which represents the member governments, insisted that that responsibility belong solely to the member states.

According to Paul Horne, a former Europe-based banker and now analyst, who writes frequently for European Affairs, these financial reform measures amount to “the most important regulatory overhaul in Europe since the creation of the euro a generation ago.” Indeed, Europe’s steady push for broad oversight of the financial sector could provide the basis for better transatlantic cooperation in setting the pace for greater global stability in managing new financial instruments.The need to find formulas for transcending national frontiers to get an EU was a hurdle that did not confront U.S. legislators in drafting the corresponding U.S. legislation on financial reform, the Dodd- Frank bill on "Wall Street Reform" that passed Congress in July .

The crowning piece of the new set-up will be the European Systemic Risk Board, which will monitor financial trends across the EU to guard against future 2008-scale threats (such as property bubbles or even larger dangerous trends). This new entity will be chaired for at least the next five years by the President of the European Central Bank – an institutional arrangement that enhances the authority of the Frankfurt-based institution, currently headed by Jean-Claude Trichet.

The accord had to bridge differing views about the need for tighter “economic governance” in the EU, with Paris favoring a stronger voice for governments in pressing their political case for more flexibility in the eurozone – for example, by accepting more generous fiscal help to countries using the euro when they are in deficit difficulties. In contrast, Berlin has insisted on preserving the powers of the ECB and other provisions designed to maintain the Stability and Growth Pact requiring government discipline on debt and deficits. That difference still remains largely to be resolved in other negotiations involving the EU Council President Herman Van Rompuy, German Chancellor Angela Merkel, France’s President Nicolas Sarkozy and other EU leaders involved in a special taskforce striving to find new common ground by early next year.

In a significant parallel development, EU finance ministers also agreed Tuesday on a system for member states to give each other advance notice of their national budgets for consideration to be assessed by the European Commission. That will allow time for a collective response to individual countries’ fiscal trends that seem to deviate from the overall EU goals. This new requirement – called the “European Semester” – will start applying to 2012 budgets to be submitted by next April.

Agreement on it was hailed as “a major improvement in our economic governance architecture,” by Olli Rehn, the Economics Commissioner in Brussels. “We can act preventively instead of sending in the fire brigade when the house is already burning,” he said, referring to the sudden eruption of a string of sovereign debt crises in EU countries early this year. This agreement to pool data contains no punitive measures or sanctions, but it helps underpin the notion of growing collective supervision of the EU nations’ economies. Britain obtained a degree of legal distance by insisting that its budget will only be sent to Brussels after it has been submitted to parliament in London.

By Juliana Knapp