• Facebook
  • Facebook
  • Facebook
  • Facebook

Search This Blog

Visit our new website.

Monday, March 04, 2013

The triple challenge behind EU move to cap banker bonuses

In a comment piece in yesterday's Sunday Telegraph - trailing today's meeting of EU finance ministers that can seal the deal on capping banker bonuses - Mats Persson looks at the three challenges that form the backdrop of this discussion: 
  • The mis-match between the relative importance of financial services to the UK and its limited voting weight in the EU's decision-making machine
  • The tendency of EU politicians to engage in displacement activities and avoid tackling the root causes of the banking (and eurozone) crisis
  • The "out of the euro but run by the euro" risk created by the creation of an EU banking union
Here's the article:
With this week’s well-publicised European Union move to cap bank bonuses, the UK now faces the prospect of being outvoted on a major piece of EU financial law for the first time. This may only be the beginning.

Fundamentally, the EU’s voting system – where almost all financial laws are decided by majority voting – leaves the UK vulnerable. While the UK accounts for 36pc of the EU’s financial wholesale market and 61pc of the EU’s net exports in financial services, it has only 73 out of 754 seats in the European Parliament and 8.3pc of votes in the Council of finance ministers. That trade-off is acceptable as long as the UK wields significant influence over EU rules – with the City serving as a global entry point to the single market, which is still does. In the 1990s and 2000s, this model served the UK well, with most EU laws aimed at facilitating trade.

Unsurprisingly, the focus of EU regulation started to change in 2008 with the financial crash. Of the 50 or so EU financial measures currently floating around, only a handful are aimed at boosting trade, most are about limiting or controlling financial activity in different ways – some of them fully justified. For many EU politicians and governments it is convenient to see the financial crash – and by extension “Anglo-Saxon capitalism” – as the fundamental cause of the eurozone crisis. Bank bonuses and the financial transaction tax, they say, help tackle excessive risk-taking and, therefore, the eurozone crisis.

This is ironic, since the same governments have simultaneously resisted many measures that would address systemic threats – such as sufficiently robust capital requirements and liquidity rules and enforcing losses on creditors. The EU has supported and approved €4.6 trillion (£4 trillion) in taxpayer-backed aid to banks over the course of the financial crisis. To think that capping bonuses will address moral hazard against trillions of state aid, borders on the bizarre.

What lies behind this self-delusion? A deliberate attempt to kill the City and drive business to Frankfurt and Paris? To some extent, but much of the motivation is, in fact, displacement activity. The tough sweeping reforms really needed to stabilise Europe’s financial sector – such as recapitalising or restructuring regional banks – often clash with regional or local politics or economics. But as politicians cannot be seen to do nothing, they take the easy route: we may not be able to create a mechanism to wind down banks but we can tell voters that we have limited the bonuses of greedy bankers. This invariably puts the City in the firing line, as that is where most of the bankers are.

This is exacerbated by a third problem – the City is a trading hub for a single currency of which the UK is not a member. The emerging union of EU banking, designed to align a supra-national currency with an interconnected banking system, creates incentives for euro states to collude in writing common financial rules that risk the City gradually being pushed “offshore”. The European Central Bank has already demanded that transactions cleared in euros move to the eurozone, which the UK has challenged in court. If we lose, it would lead to a two-tier single market, with a protectionist eurozone bloc – and trillions of euros worth of transactions could leave London.

The UK Government has taken steps to ensure a competitive financial services sector against the backdrop of an EU banking union. But the City and the finance sector are on the front line of the EU debate. If this hub of economic activity becomes a casualty, how could a UK government still defend EU membership? 
The FT today needs two separate comment pieces (behind pay wall) to make the same points - but worth a read nonetheless.


Rollo said...

The solution to all these woes is simple: UK out of the EU. We must ste out own rules.
The EU of course will retain the right to shackle their own businesses and to assist the downward spiral they are certain to slide down under the direction of the Politburo/Commission.

Bugsy said...

Rollo is right we must leave the EU and the time to do it is before the next election.
The ambitions of Frankfurt and Paris to capture the business done in the City plus the increasing laws and regulations that hinder growth and the development of business will eventually destroy the UK economy. This destruction will be accelerated by the burdens placed on our tax payers by the increasing levels of EU immigration, if as it seems, Germany begins to refuse entry to some EU citizens.

Average Englishman said...

Boris Johnson in the Telegraph today described the EU anti-bonus issue as 'throwing a dead cat on the table'. As you say, a simple distraction technique to take the thoughts of people away from the real problems of the Euro that can't be fixed.

This sort of Blair 'spin' works for a while but you can't fool all of the people all of the time, especially when you're Spanish, Greek, Portugese, Cypriot, etc. and are out of work looking for food in dustbins.

Ultimately, the democratic process will destroy this morally corrup way of going about things or democracy itself will be crippled further. The EUSSR rules? Not in the UK thank you.

Anonymous said...

Another comment in the Sunday Telegraph was from Christopher Booker in which he stated that Article 153.5 refers only to rules solely relating to "self employed" persons. And furthermore makes clear that the EU cannot legislate on pay. If this is so why are our politicians evoking this point.

Anonymous said...

A capitalist and hopping global financial market -- the UK -- sitting right next to a protectionist, Communist, centrally controlled and sclerotic economic wasteland -- the EUSSR.

Hmmm.... I wonder where the most global investment would go

Anonymous said...

Once again, the EU is revealed in its true colours: dirigiste and undemocratic, socialistic,unrealistic, and tiptoeing round the real problems. I am 76 now and hope that, for my grandchildren's sake, I witness a United Kingdom with the shackles of the EU thoroughly shed - once and for all - and pursuing trade etc. relations with energy and enthusiasm among Commonwealth Members and other hard-driving countries in the Far East. Leave Europe to shrivel in its mouldering socialist corpse.

christina speight said...

While not altering my opinion that both the euro and the EU itself are actual evil in their make-up and effects this issue raises a legal question ALSO in yesterday's Sunday Telegraph

I fully share British concern over Bank Bonuses in the Sunday leading article- "Make no mistake, the EU is at war with the City" _ [and news stories] today but my concerns were allayed by the main paper's same issue and Christopher Booker's column ("The EU has no power to cap our City bonuses").

He says the proposal is supposedly based on a reading of Lisbon Treaty Article 53.1 which, however, he says "relates solely to the rules governing 'self-employed persons'. ". He goes on to point out that under the other article mentioned 153.5 "the EU cannot legislate on pay." If true the EU once again ignores or enforces the law when it suits it without a moment's thought as rto the actual wording of the law.

I wonder if Open Europe or any reader has any contrary opinion on this and if not perhaps OE and We should acquaint our politicians - especially Cameron-Osborne - with these facts as they seem woefully unaware of them. Unless, cynic that I am of course, they know this and are preparing to grandstand their smashing victory over the EU.

jon livesey said...

There is an interesting begged question that always appears in discussing the EU. The issue is: how to avoid EU domination when so much trade or financial business depends on the EU.

The conclusion you are invited to come to is simple: since we depend on the EU we are ultimately helpless and may as well reconcile ourselves to our fate.

But there is another conclusion, which is that we should become less dependent on the EU.

This is already happening in non-financial trade. The EU market has dropped from being 55% of UK exports to 45% and even less if you count end-user exports, and not exports we send through the EU for re-export.

The same thing is bound to happen in finance. We live in a connected World, where geographical distance matters less and less. The EU economy is actually shrinking, while those of India, China, the US and Brazil are growing.

Leaving the issue of EU membership aside, the amount of leverage the EU has over the UK is gradually diminishing, whhich I would guess is why Cameron's re-negotiation statements have sent EU politicians into such a lather. They know that time is not on their side, and if they can't get the UK firmly tied up now, they probably never will.

christina speight said...

Jon - meanwhile while we dither they are tying up the City on which we DO depend in knots and by the time any disentangling actually takes place it will be no more, and we will have gone the way of the Med-countries.