This week, the Ministers of Finance and Economic Affairs of the EU27 met in Brussels. On the agenda were the budgetary situation in Greece, which is a welcome opportunity for speculators to attack Greek state securities and the Euro, as well as an initial debate with the new Internal Market Commissioner Michel Barnier and the introduction of a paper on the future of the internal market by former Commissioner Mario Monti. The Ministers also used the opportunity to talk about the spectacular proposals by Barack Obama on financial market regulation.

Following the first meeting in Brussels of the heads of state and government of the EU on the initiative of the new European Council President Herman Van Rompuy, in which they proclaimed themselves to be Europe’s real economic government, this week’s meeting of the Ministers of Finance and Economic Affairs (ECOFIN), who traditionally determine the EU’s economic policy, was eagerly awaited. 

US Investment banks help Greece with budget cosmetics

Apart from a further tightening of the pace towards the Greek government, which for the first time in EU history was threatened to lose its vote at the next ECOFIN meeting, there were above all some details concerning the surrounding circumstances of the “Greek tragedy” which caused a stir. It became known for example that the Greek government had engaged in particular US investment banks to beautify the budget deficit with the aid of highly complex and tailor-made derivative transactions at the end of the nineties. It is alleged, for example that expected future income from the lottery business or from the landing fees for planes was virtually pledged and entered as income. An extremely lucrative business in particular for investment banks. That is why the Commission asked the Greek government to reveal all background information about such transactions within the next days. The new European Economic Affairs Commissioner, the Finn Olli Rehn, spoke of an “Ethical misconduct” of the banks. Fact, however, is that this is not about the banks’ bad behaviour but about inadequate rules and a lack of control.

Hedge funds attack Greece and the Euro: Regulation more important than ever!

This becomes even clearer if one takes a closer look at another inconsistency in connection with the attack of the “markets” on Greece and the Euro. This concerns the role of hedge funds and investment banks – often the same institutes, which gainfully participated in working out the resourceful financial mechanisms for Greece and other countries – with regard to the attack on the Greek state securities and the Euro. So-called credit derivatives on sovereign credit default swaps are used for speculation purposes. A particular feature of this “market” is that there is absolute no public supervision or control as to who places which “bets” with whom. The agreements are negotiated between the individual contracting partners (usually hedge funds and banks) away from public scrutiny (over the counter). As a result, as it already became clear during the first episode of the financial crisis, significant risks can build up for the stability of the entire financial system without the public having any opportunity of exercising control, as enormous amounts are invested. AK and the trade unions have long supported the idea that trade with all types of derivatives is at last regulated and controlled by the EU. They are waiting for a legislative proposal of the Commission, which is supposed to come later this year. The events surrounding Greece also show that a strict regulation and supervision of hedge funds is more necessary than ever.

New Internal Market Commissioner Barnier: Strong regulation, but the European way

The Ministers also engaged in a first information exchange with Michel Barnier, the new French Commissioner, who will in future  be in charge of the internal market and financial services. Already during his hearing in the European Parliament he was able to convince all those who support a strong and active role of Europe with regard to regulating and supervising the financial markets. The ministers also discussed the proposals of the US President on financial market regulation. As is well known, the Volcker Group commissioned by Obama had thrown the Europeans into turmoil by coming up with very far-reaching proposals: separation of customer and investment banks; ban on customer banks to invest in hedge funds; limiting the size of banks to prevent them from getting so big that the state has to bail them out during a crisis. Whilst some Member States such as the Netherlands and Sweden definitely showed some interest in the US proposals, Barnier made it nevertheless clear that Europe would pursue another philosophy of regulation and asked the USA to start looking again for joint solutions within the international discussion forums (G20).

Monti: Internal market can only be deepened if tax dumping is ended

Another important development was the first-time dealing of ECOFIN with the key aspects of a paper of the former Internal Market and Competition Commissioner Mario Monti, who was asked by EC President Barroso to collect new political ideas for the future of the internal market. This initiative is of decisive importance because Monti works on the assumption that any further development of the internal market is only politically conceivable, if tax dumping is ended at the same time. A demand, which has been expressed by AK and trade unions for many years, but which so far has always failed because of the unanimity rule in case of tax issues and the national self-interests of some Member States.

Further information:

AK position paper on the Communication of the European Commission: Ensuring efficient, safe and sound derivatives markets

AK position on the proposal for a directive on alternative investment fund managers (hedge funds and private equity)