Whilst I’m aware that President Sarkozy’s triumphalist words were mainly for his domestic audience and, therefore, should be taken with a slight pinch of salt, the general tenor of his words are discomforting to anyone who believes that the City of London is a vital part of the British economy.
On clinching the post of the Commissioner for the Internal Market, including financial services, for his man Michel Barnier, Mr Sarkozy is quoted as saying “Do you know what it means for me to see for the first time in 50 years a French European commissioner in charge of the internal market, including the City?” “I want the world to see the victory of the European model, which has nothing to do with the excesses of financial capitalism”. In other words, Anglo-Saxon markets beware - we’re going to regulate financial institutions heavily irrespective of what non-EU financial centres may or may not do. In the wake of the financial crisis it is widely accepted that more effective regulation is needed. But such regulation should be agreed at a global level.
Sadly, this development is all too inevitable. But, I fear, City grandees bar a few concerned individuals have just woken up to the very real threat to the City from the EU. The EU’s (including the Commission’s) behaviour is only to be expected. Not only are they continuing to push ahead with “the ever closer union among the peoples of Europe” in all spheres including economic but they are also following their long-established pattern of achieving this objective by heavy, centralised regulation.
There is a widespread misunderstanding in Britain that the Single Market (or Internal Market) is equivalent to a free trade area – with no regulatory strings attached – a sort of glorified EFTA. If only! But nothing could be further from the truth. After all in much of the EU Anglo-Saxon free markets are regarded with great distrust, as can be seen from Mr Sarkozy’s comments. They are “chaotic” and inherently unstable. Instead markets need to be tightly regulated for their own good. Moreover, the regulations need to “harmonised” so no country has “unfair competitive advantages” – and they need to conform to the protectionist European Social Market Model. The Single Market brings benefits, of course, but they are outweighed by the costs. Commission figures suggest the annual costs could be at least €600bn, whilst the benefits may be around €225bn.
Let us remember that Britain volunteered for the EU’s involvement in and the extension of the Single Market into financial services. They came into the orbit of the Single Market when it was agreed to develop a Financial Services Action Plan (FSAP) at the Cardiff Summit in 1998, under the British Presidency. This country was a prime mover in extending the Single Market to one of its most cherished industries having failed to learn any lessons from the way in which the Single Market had developed during the 1990s.
Since then there has been a blizzard of costly regulations the benefits of which remain, in the absence of any comprehensive Cost-Benefit Analysis, inadequately assessed. But the most crucial aspect of the FSAP was not the specific regulatory blizzard that emanated from the original plan in itself. By signing up to the FSAP, Britain handed over control of specific regulations for the British financial sector to the EU. The UK is but one voice amongst 27 in the EU. Most of the 27 are not interested in, or understand or are even sympathetic to the City. Some are downright hostile.
In the wake of the financial crisis the EU has been quick to extend its power over financial services. No-one should be surprised by this move. The draft Alternative Investment Fund Management (AIFM) Directive is one manifestation. Many in the City view the proposed Directive as little more than a vindictive and opportunistic act by Brussels’ to “get at” London. But whatever the motivation, it will disproportionately disadvantage Britain.
But it is not the most significant manifestation.
More important has been the EU powergrab for a direct supervisory role and the power to overrule national supervisory authorities. This is a new and profoundly significant development. There are two proposed EU supervisory bodies. Firstly, the “micro-prudential” over-arching European System of Financial Supervisors (ESFS) which is concerned with individual financial institutions and comprising three supervisory authorities for banking, securities and insurance. Secondly, the “macro-prudential” European Systemic Risk Council (ESRC) which is concerned with the overall stability of the financial system.
Lord Myners, Financial Services Minister, has already conceded that the ESFS will transcend national supervisory bodies. In a Lords written answer he said in July 2009 “The European Commission has indicated its intention to use Article 95 of the EC treaty as the legal basis for its proposals to establish a European System of Financial Supervisors. The European Commission has confirmed that day-to-day supervision of financial institutions should remain at member state level.”
So the FSA (and/or the Bank if banking regulation is shifted to the Bank) will be responsible for the “day-to-day” supervision of financial institutions in the world’s premier global financial centre – but no ultimate control. That control will be exercised by EU institutions, where Britain’s voice could well be an isolated one. London will be the loser, whilst the beneficiaries will include Geneva, Zurich and New York.
