What are they thinking?

Things aren't looking great for the AIFM Directive. At least not from the point of view of developing countries, SMEs, European taxpayers, pensioners and assorted charities - all of which will be negatively affected if the Directive is passed in its current form. In fact, there has rarely been a law with so many losers and so few winners.

In addition, the City of London is clearly a vital national interest for the UK, and the AIFM Directive would land a blow to the square mile at a very critical time. EU leaders will make a serious political mistake by forcing through something like this only one week after the new British government has taken office. Despite the UK being home to the bulk of the industry in the EU, the Conservative-Liberal government has virtually no room to prepare for the negotiations (or even catch their breath). According to Angela Merkel, EU leaders simply intend to walk all over the Cameron government under majority voting rules. This is a clear break with conventional negotiation practice in the EU, where national interests are usually taken into account. (read our take on it here)

Frankly, what are they thinking? Undercutting a fragile coalition government for which 'Europe' is clearly a make or break issue is probably not the best way to ensure the UK's constructive long-term engagement with Europe. It also happens to be an attack on US interests, as funds and managers based offshore will find it far more difficult to access the EU market under the Directive - in turn increasing the scope for regulatory retaliation.

And from EU leaders' point of view, why put the Lib-Dems - the one remaining voice for EU-enthusiasm in the UK - in such an awkward position? This will seriously undermine the party's ability to defend its line against Tory backbenchers.

And, remember, Europe needs capital - governments and firms alike - in order to bounce back from the downturn (remember the €750 billion package agreed last weekend?). The AIFMD is a blow to an industry which can provide just that. Indeed, it's fully possible to introduce stricter rules for transparency and accountability - which the industry needs - without negatively affecting capital flows and growth (the Swedish EU Presidency came close to producing such a compromise proposal in December).

The story of the AIFM Directive is simultaneously an illustration of how poor the UK government and the City of London are at engaging with Brussels, and how difficult it seems to be for EU leaders to let political and economic reason prevail over ideological bias and short-term thinking.

An often repeated question is: imagine if this was a law threatening French agriculture or the German car industry...? We suspect that the game would have looked very different. For an example, compare the language coming out of the UK over the weekend on the AIFMD to the strong French defence of the agriculture sector in response to recent discussions on possible bilateral trade talks with other regions.

According to the Sunday Telegraph, a UK Government source said that "There is a majority in favour of the directive and we don't want to be in a position where we squander any negotiating capital we have for the future on an issue it doesn't appear we can win." (okay, but why allow it to get to this point in the first place).

In contrast, French Agriculture Minister Bruno Le Maire said today in response to why France is opposed to the EU re-launching trade talks with the Mercosur countries:

France is opposed to resuming negotiations [with Mercosur countries], because they would inevitably end in further concessions to the detriment of French and European farmers. I don’t see why agriculture has always to be the adjustment variable of trade negotiations in Europe.

No compromise there.

It's true, French farmers don't make for as convenient scapegoats for the failures of a certain Single Currency. But still, you would hope that EU leaders could see common sense and have at least delayed this vote to allow the new UK government some time to prepare.

At the end of the day, this would be in Europe's interest - economically as well as politically.