EU regulatory structure update

Happy June everyone!

The weather here in Santa Fe has been rainy and monsoon-like. It has staved off summer’s normal hot dryness. Whew! However, I am about ready for some lovely high-desert weather. I hope things are well wherever each of you is.

Today’s post is an update about the regulatory rumblings that are taking place in Europe. Remember that I have been saying as recently as last week that the European Economic Union needs an overarching financial regulatory structure. Specifically, last week the European Commission proposed to its 27 member states the creation of two new institutions for pan-European oversight.

The first proposed institution would be called the European Systemic Risk Council (ESRC) and the other would be called the European System of Financial Supervisors ( ESFS). The ESRC would compile economic-wide data in order to warn member states of possible economic risks. In other words, they would be an official consultant to the member states, but have no regulatory authority to do a damned thing. Hmmm. I’ll let each of you evaluate on your own the efficacy of such an institution.

The second proposed institution, the ESFS, would increase the powers of three extant organizations into a European Banking Authority, European Insurance and Occupational Pensions Authority, and a European Securities Authority. The goal would be to create uniform standards for bank solvency, as well as facilitate arbitration of disputes where a trans-national European bank is involved. Gotta love the Europeans and the EU. Nice in concept, but about as effective as the United Nations for implementing policy. That is, each of the member states in Europe have their own agendas and so the only way they can find to work with one another is by advisement (the ESRC) and by arbitration coordination (the ESFS). Can the nations of Europe work together? That is the 10 trillion Euro question.

At this point Germany is the main mover and shaker behind the proposed creation of these two new institutions. However, Britain, which as the second most important financial markets in the world after the U.S., is balking. Why would they balk? Because to agree to coordinate policy with the rest of Europe, Britain would be surrendering control and sovereignty over a big source of its national power. But there are other countries that are already tempering expectations, including Belgium, Ireland and others and for largely the same reasons. Most of us Americans don’t know that the EU is an economic free-trade zone only. When asked to vote on political unity half a decade ago, the citizens of Europe did not vote for the privilege. In fact, it was a decisive defeat for the concept of the EU and the nation primarily behind its thrust: France. Since that time Europe has continued to enjoy the benefits of a unified currency and free-trade, but any further efforts to surrender sovereignty have failed.

My guess is that if these current suggestions for reform are the best that Europe can do then this current global crisis will not contain any lessons for Europeans. Even if these two institutions are created it won’t do a thing to help Europe emerge from the current recession. And even in the next recession the creation of these institutions will likely have no effect. Imagine if, under the terms of the North American Free Trade Agreement (NAFTA), a Mexican committee was issuing decrees to the U.S. that economic activity in the U.S. was potentially risky and there were no enforcement mechanism. Imagine if that same Mexican authority was upset at Citigroup issuing loans at high interest rates to aggrieved farmers in rural Mexico and they offered to arbitrate on behalf of the farmers, Mexican banking authorities, and U.S. banking authorities. My feeling is that Citigroup would laugh. Not only that, but the Mexican government would be better off bringing a lawsuit against Citigroup under Mexican legal authority, don’t you think?

These new proposals from Europe are, in short, a waste of time. What will happen is that these proposals will be debated and argued for less than a year. Once there are some signs of global economic recovery then the hubbub will die down and not much will have changed. Good luck European citizens!

Jason