EU bureaucrats are seizing on the financial crisis to centralise financial regulation in Brussels – a move welcomed by France and Germany as a way of curbing their competition from London. But this new EU regulatory bureaucracy will not improve financial stability and will only cause business to drift away from the EU to the financial centres of New York, Switzerland, and the Far East, says the Adam Smith Institute in a strongly-worded new report.
Despite Lord Mandelson's claims that he will defend Britain's interests – saying that "we have more skin in this game than the rest of Europe put together" – the Chancellor and the Prime Minister seem to have rolled over and accepted the EU proposals, even before the public consultation on them has ended, claim the report's authors, Tim Ambler of the London Business School and regulation expert Keith Boyfield.
"When you look at this you wonder whether Alistair Darling's White Paper on UK financial regulation is a rather pointless exercise," said Boyfield, chair of the Regulatory Evaluation Group. "It seems that we have already handed over our right to police ourselves, despite the fact that London's financial market has more scale, experience and expertise than the whole of the rest of the EU." Under the new proposals, the UK, with its huge financial sector, would have no more voting power than Latvia, which is on the edge of collapse.
Brussels wants to create two new bodies, the European Systemic Risk Council and the European System of Financial Supervisors, despite any evidence that the lack of EU cross-border rules had anything to do with the crisis. The real need, they argue, is to improve the supervision structures that failed in individual EU countries – including Britain. But "instead of dealing with the fundamental problem, the European Commission is proposing to add new bureaucratic structures" that will be top-heavy and could actually make financial instability worse. "The proposals seem opportunistic, using the financial crisis to provide an opening for long-held political objectives in Brussels," the report suggests. "These proposals are not just a knee-jerk political reaction. They are too well thought out for that."
The report echoes complaints last week from the Mayor of London, Boris Johnson, that London's innovative hedge fund industry had nothing to do with the financial crisis, and would be crippled by the heavy hand of new EU bureaucracy, driving them to New York and Shanghai. He agreed with the report's authors that "what is good for London's financial services sector is good for the EU".
There are also proposals to create three new European Banking, Pensions and Investment authorities, all with executive powers to control firms across the EU, stripping Britain of control over its own financial sector. But, says Ambler, "Since financial crises of this scale come along only every sixty years or so, there is no economic reason for this haste." He suggests that these deals were all stitched up at the G20 meeting in April, where President Sarkozy threatened to walk out unless new EU-wide financial regulations were agreed.
Instead, the report calls on the European Commission to conduct a thorough investigation into the real causes of the crash, which they believe was actually made worse by international regulation such as the Basel II banking code – rather than rush headlong, for political reasons, into new cross-border regulation that could simply increase future instability. It says that the EU should aim for "bottom up" improvements in European countries' financial supervision, rather than imposing "top-down" regulation.
"The UK should lead strongly on a positive agenda for financial regulation in Europe," said Adam Smith Institute director, Dr Eamonn Butler. "That will focus on the need for prudential supervision by central bankers (like the Bank of England) rather than tick-box regulation from the likes of the Financial Services Authority. If we focus on improving supervision in the individual EU countries, then the financial services industry of Europe as a whole will get along fine. But if we shackle the diverse financial industries of Europe with heavy-handed, "one size fits all" regulation, the only gainers will be New York, Switzerland, and the Far East."
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Financial Regulation: What is the best solution for the EU? Is published by the Adam Smith Institute, 23 Great Smith Street, London SW1P 3BL. The full report can be downloaded for free at: http://tinyurl.com/mme94a