Pressure mounts on conservatives in European institutions for financial market reform 

11 June 2008

Pressure is mounting on conservatives in the European Parliament and Commission to abandon their hard-line opposition to improved regulation of global financial markets. Calls for reform are coming from both sides of the Atlantic and from senior conservatives including German Chancellor Angela Merkel and the US Administration. 

• German Chancellor Angela Merkel calls in today’s Financial Times for a European credit ratings agency – a demand already put forward by PES President Poul Nyrup Rasmussen in his report to the European Parliament which is being fiercely resisted by some conservative MEPs; 

• A recent US Department of the Treasury report “Blueprint for a modernized financial regulatory structure” by Treasury Secretary Henry Paulson proposes a new regulatory structure for financial institutions including a Federal Financial Services Provider "to incorporate a wide range of financial services providers, such as broker-dealers, hedge funds, private equity funds, venture capital funds, and mutual funds" which would set standards such as net capital requirements and public disclosure;

• The President of the European Commission’s three predecessors – Romano Prodi, Jacques Santer and Jacques Delors – have all now given their support to the letter urging President Barroso to respond more decisively to the global financial crisis. The letter, which now has the backing of nine former Prime Ministers, three former European Commission Presidents and six former Finance/Economics Ministers, states “This financial crisis shows all too clearly that the financial industry is incapable of self-regulation. There is a need to improve the supervision and regulatory frameworks for banks. There is a need to revise the regulatory frameworks for investment vehicles.” It also proposes a “World Financial Conference in order to rethink the rules of international finance and the governance of global economic issues”;

• The President and Chief Executive of the Federal Reserve Bank of New York, Timothy Geithner, proposed in an article published earlier this week “more exacting expectations on capital, liquidity and risk management for the largest institutions” and claimed that “the regulatory framework cannot be indifferent to the scale of leverage and risk outside the supervised institutions”;

Poul Nyrup Rasmussen commented “Conservatives in the European Parliament and Commission are on their own in resisting financial market reform. Senior conservatives on both sides of the Atlantic support reform, but not Commissioner McCreevy or conservative members of the Parliament’s Economic and Monetary Committee. Why conservatives in the European institutions are still holding out against sensible reform is impossible to understand. They are certainly not helping the financial markets by pretending it is still possible to escape regulatory action.”

“The US Treasury’s proposal for hedge and private equity funds is very significant and has been largely overlooked in discussion of Paulson’s plan. He has proposed exactly what Charlie McCreevy and some European Parliament conservatives are desperately trying to avoid, which is to make hedge and private equity funds play by the same rules as everyone else. Pressure is mounting for sensible reasonable, and at some point the pressure will be irresistible.” 

In his report currently before the European Parliament’s Economic and Monetary Committee PES President Poul Nyrup Rasmussen proposes a comprehensive set of measures to promote greater financial stability, ensure more transparency, prevent conflicts of interest, and reduce excessive debt. Instead of 27 different sets of national rules Rasmussen proposes one single European framework that would boost the financial market, jobs and economic growth. His proposals include:
 
• A ‘single entry point’ into a single European financial market with a European Union framework for transparency, registration and authorization for managers of hedge and private equity funds;
• Reducing the danger of extreme risk taking and excessive debt by introducing new ‘capital requirements’ – like those that already apply to mutual funds, banks and insurance companies;  
• Ensuring the viability of our private companies through protection against capital depletion;
• A European Union Public Credit Agency – an independent, conflict-of-interest free credit rating agency to introduce much-needed competition into the credit rating industry;
• A European Financial Supervisor covering all financial sectors to increase cooperation between national supervisory bodies and oversee cross-border and European-wide activities.

His report has received strong support from the trade union movement. In a statement issued on 2 June the Trade Union Advisory Committee to the OECD said “trade union leaders from OECD countries, including representatives of major European trade union confederations, declared jointly with the European Trade Union Confederation their support for the recommendations laid down in a report on hedge funds and private equity which is to be discussed this week before the Committee on Economic Affairs of the European Parliament.” ETUC Secretary General John Monks is quoted as saying “Politicians must do the right thing and support the recommendations of the Rasmussen report.”

The PES has been pressing for some time, and since before the current financial crisis, for action on the alternative investment market which in recent years has gone from niche to a major mainstream player in the global financial market. In November last year all PES member parties  adopted a resolution calling for more transparency, more effective taxation and leverage limits, while in December 2007 Socialist Employment Ministers expressed concern about the impact of hedge and private equity funds on jobs and workers rights. 

Meanwhile thee level of loans involved in leveraged buy outs continues to rise this year, despite the credit crisis, sharply increasing the risk of company defaults according to a report issued this month by ratings agency Standard & Poor’s.

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