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Financial Crisis

5. EU action in a global context

Global action

Over the course of the recession, the European Union has been keen to show global leadership. In April 2008, the Group of 20 leading industrial and emerging nations adopted a declaration on financial reforms with major items from the EU's wish list.

Measures included moves to tighten regulation, to curb excessive executive pay, to regulate credit rating agencies, to strengthen oversight of hedge funds and private equity and to crack down on tax havens. The EU is now in the process of introducing policies on all these fronts in the hope of leading by example.

Banker pay

The April 2009 G20 summit took place amid angry protests over executive bonuses. World leaders endorsed principles on pay and compensation developed by the Financial Stability Forum, a group uniting national financial authorities. Countries should implement principles by the end of 2009.

In April 2009, the European Commission issued a communication on pay and compensation aimed at discouraging excessive risk taking. Under the guidelines, executive pay should be fully disclosed and decided at board level. Severance pay should be limited to no more than two years of fixed salary. In cases where performance is deemed unsatisfactory, payments could be withheld. Member states' performance will be tracked in an annual scorecard. In June 2009, the Commission unveiled proposals that would give national supervisors powers to impose sanctions on institutions rewarding reckless behaviour. The proposals were incorporated into a revised version of the Capital Requirements Directive.

Credit rating agencies

Credit rating agencies such as Moody's and Standard and Poor's played a significant role in the securitisation debacle by giving excessively high ratings to toxic products. Firms that were supposed to alert investors to risk were actually in the pay of the issuers selling toxic assets. G20 leaders pledged to introduce regulatory regimes by the end of 2009 that would be overseen by the International Organization of Securities Commissions.

In May 2009, EU lawmakers approved a regulation aimed at reducing blatant conflicts of interest in the rating process and increasing transparency on the market. Firms will now be forced to register with the Committee of European Securities and Regulators. The regulation enters into force in 2010.

Hedge funds

Hedge funds did not cause the financial crisis, but their short-selling strategies are thought to have perpetuated the turmoil. G20 leaders will work through a newly-established global regulator called the Financial Stability Board (an enhanced version of the Financial Stability Forum) to ensure international risk monitoring.

In May 2009, the European Commission proposed a directive on alternative investment fund managers. The rules, which target hedge funds and private equity, would require fund managers to register and obtain authorisation for activities. These managers would have to meet strict reporting, governance and risk-management standards. Industry responded with fury to the proposals, claiming that they would cripple businesses managing a total of €2,000 billion in assets. The directive is likely to be passed in 2010.

Tax havens

With the financial crisis squeezing cash flows to public coffers, tax havens are under intense international pressure to lift the lid on account holders. The UK, France and Germany have been leading the drive to force secretive jurisdictions to open up. Germany, which launched controversial probes into Liechtenstein-based accounts in 2008, netting hundreds of millions of euros, is especially vocal on the matter.

The European Union is currently pushing for information-sharing deals with Liechtenstein, Switzerland, San Marino, Monaco and Andorra, which would automatically open records on account holders and deposits. These jurisdictions are party to the EU savings taxation directive, but are allowed to charge a special withholding tax to guarantee account holders' privacy. Within the EU, Austria, Belgium and Luxembourg also enjoy the same opt-out from the directive.

In April 2009, the European Commission issued a communication on tax governance issues. The communication states that all EU member states will move to automatic information exchange once third countries adopt international standards drafted by the Organization for Economic Cooperation and Development. The OECD submitted a 'grey list', which included all eight countries, to the G20 summit in April 2009, sparking angry reactions from Luxembourg, Austria and Switzerland.

World trade

The EU is working with international partners towards a revival of world trade talks. It is thought that concluding the Doha round of World Trade Organization talks, launched in 2001, would be a major boost for the global economy. The negotiations fell apart in 2008, with the US unwilling to accept deep cuts in support to domestic farmers and emerging economies reluctant to open their markets for industrial goods and services

But while WTO talks remain in deep freeze, the EU will be playing the bilateral card. Negotiators hope to seal a deal with South Korea by the end of the 2009. EU-Canada talks currently underway are expected to progress rapidly and could open the way towards a wider North American agreement. The debate over whether such deals run counter to the spirit of multilateralism is still wide open.