Analytics, Economics, Education and Science, Financial Services, Legislation

Five years after the start of the financial crisis, the economic situation in Europe remains fragile: still zero growth is expected in Europe this year; unemployment in the euro area is at 11 per cent (and above 22 per cent for young people), and many companies have trouble finding finance for new projects.

EU’s financial governance

The June 2012, the European Council has agreed on significant measures to step up Europe's financial governance. For the first time, the EU-27 has a comprehensive agenda to address Europe's challenges.

More specifically, the Council has agreed to:

• build a banking union;
• increase budgetary integration; and
• achieve a genuine Economic and Monetary Union.

The Commissioner underlined that Europe's financial centres also have key roles to play in the post-crisis recovery in at least two aspects:

First, they should be capable of meeting the needs of and supporting their economies and societies. The quality of services they provide to domestic firms is essential to the efficiency and competitiveness of their countries.

Secondly, financial centres should be key elements of the European single market. But their role should go much further than only facilitating free movement of capital.

More specifically they should perform at least the following functions:

• They should support and strengthen the connections across a wide range of economic sectors.
• They should provide employment opportunities in all types of services typically present in a financial centre.
• They should contribute to true innovation and productivity.
• And lastly - they should be Europe’s gateways to the global financial markets. As such, they have the potential to improve the efficiency of Europe’s economy and help us compete globally.

Besides, Europe's financial centres are a central part of the global financial system. This is because they provide a global hub for financial institutions, firms and investors. And - as such - they secure for everyone the benefits that wider, deeper and more integrated markets can offer.

Reference:  Press Release, SPEECH/12/589, 6 September 2012. Michel Barnier, Member of the European Commission, responsible for Internal Market and Services.   

Europe's financial centres: challenges

The Commission’s approach to reforms in the sector is based on two approaches:

First, the EU needs to stabilise the financial sector and re-establish confidence.  The EU is approaching the end of its largest ever program of financial services reform. Financial markets have been at the heart of the recent financial crisis.

The crisis exposed serious inadequacies, such as:

• regulatory gaps;
• inadequate supervision;
• poor corporate governance and short-termism in financial institutions;
• opaque markets; and
• overly-complex products, especially derivatives.

Second, the EU needs to put in place measures to ensure the financial sector supports healthy growth and investment. As a result, it became clear that the financial services sector could not escape reforms. Moreover, the experiences during the crisis have clearly demonstrated that the member states need common European rules.

The so-called single rulebook will contribute to creating a more stable, transparent and competitive financial sector in Europe.

Against this backdrop, around thirty targeted measures have been proposed by the European Commission (its goal is to make new legislation to be enforced by 2013).

This considerable reform program now addresses all the key commitments agreed at the G-20 agenda. It puts Europe at the forefront of the global effort to positively transform the financial sector and financial centres.

Critical approach

The Commissioner said that some commentators criticised the EU financial reform agenda to the detriment of economic growth.

They argue that the new rules:

• are excessive,
• create unnecessary red tape and
• impose significant costs on financial institutions,

He provided three answers to these arguments:

1. First, European states are part of a joint, international effort to stabilise the financial sector.

2. Secondly, there is no one silver bullet to address all the shortcomings that contributed to the crisis. Instead, a series of targeted measures is needed to reform financial institutions, infrastructures and instruments.

3. Lastly, each of our proposals is carefully calibrated to be bearable for the financial sector and to support the real economy.

In particular, the EU is careful to allow time for financial institutions to adapt to new requirements. For example, the Commission has proposed that the new bank capital requirements should only enter into force at the end of this decade.

The EU also paid great attention to the economic impact of present reforms, especially on SMEs. For example, Commission’s proposal for revised legislation on securities markets will be beneficial for SMEs seeking funding via financial markets. This is thanks to the SME labels and more relaxed rules on listing and reporting.

Then, the Commissioner concentrated on the topic of sustainable growth, which is the second pillar of the EU’s reform program. Bringing Europe back to the path of sustainable growth requires taking up a series of challenges. Amongst them:

• the EU-27 needs to build modern digital, energy and transport infrastructures;
• the EU needs to support the development of innovative technologies; and
• the EU needs to tackle climate change and population ageing.

All these challenges require long-term financing; given the state of public finances, it is clear that not all long-term financing needs can or should be met by European taxpayers.

Financial canters’ tasks

Here again the financial centres have a key role to play; they should perform at least three tasks:

• First, they need to provide a stable platform for institutional investors such as pension funds and insurers to match their long-term liabilities with long-term assets;
• They should also offer safe and profitable vehicles for household savings;
• Lastly, they need to support sustainable, green and socially-responsible economic growth.

In this respect, the Commission is currently examining how to ensure that the financial sector is fulfilling these roles as efficiently and effectively as possible. The Commission plans to launch a broad consultation on this subject around the end of 2012. In the meantime, the Commission takes action in relation to investment funds, which play a crucial role in financing the European economy.

More specifically, the Commission has proposed to create a European market for venture capital and socially-responsible investment funds. Such a market will allow these funds to raise money and to invest anywhere in the EU. This will increase chances for start-ups and companies involved in social and environmental activities.

The Commission also wants to build further on the success of the UCITS brand. Some member states have rules in place which facilitate access to long-term investments in private companies for retail investors. Drawing on this experience, the Commission is currently reflecting on whether an EU approach in this context could also help boosting growth in Europe.

Financial reforms in the EU

The reforms proposed by the Commission are concentrated on the following issues (the reforms that are still to come are based on the EU original financial regulation program which is nearing completion). But the reform process is not yet over as new challenges and priorities emerge. Therefore the process of transformation in Europe's financial sector needs to continue. The Commissioner mentioned three issues that we will need to deal with in the next few months:

First, the European banking union: it is needed to break negative interconnections between banks and governments. Following the June European Council, the Commission will shortly present a legislative proposal to establish a single supervisory mechanism as an essential first step towards the banking union.

Second, the structure of the EU's banking sector. Interesting work has been launched at national level: e.g. the Vickers Report in the United Kingdom or the Volcker Rule in the United States. But in a truly integrated single market, these things shall be worked out together, not separately.

With this point in view, the Commission set up an independent High-level Expert Group headed by Erkki Liikanen, Governor of the Central Bank of Finland. The Group is finalising its work in October 2012; then the Commission will evaluate its recommendations and respond as appropriate.

Third, shadow banking.  Non-bank credit activity performs important functions in the financial system: it creates additional sources of funding and offers investors alternatives to traditional bank lending. However, as the crisis has demonstrated, shadow banking can also pose potential threats to long-term financial stability.

Following the Commission consultation at the start of 2012, it was decided that some appropriate next steps would be taken, including legislative measures - if necessary.

New challenges

Growth and stability in Europe is having two equally essential reform pillars. They also remind about the need to be sensitive to potentially unintended consequences of these reforms. “We need to continue to assess their impact and stand ready to adjust our proposals if necessary”, argued the Commissioner.

The driver behind the EU’s agenda has always been the growth of the real economy and the need to support European competitiveness. To achieve this, the Commission needs a competitive, strong and healthy financial sector, rooted in successful, responsible and safe financial centres.

Therefore, the EU-27 needs to pursue the reforms to make sure that Europe's financial sector and its centres can perform their national, European and global tasks in a safe, efficient and effective manner.

“We have made a lot of progress to date, but there is still more to do”, concluded the Commissioner.