Eurozone Watch

Yesterday’s decision by the Ecofin to water down the Commission’s proposal on the reform of the European Financial Market supervision to make it little more than a teethless tiger is deplorable. But the last word is not spoken – the European Parliament seems set to give the Ecofin a hard time.

From the start, the De-Larosière-Process was driven by a lack of political ambition. A few months ago, when de Larosière gave the press conference on his group’s report on Financial Market Supervision, he was asked why the report was rather unambitious (by the way, it was almost entirely adopted in the European Commission’s proposal to the Ecofin). He is reported to have answered something like he wanted to be realistic (which can be interpreted that he did not put the most reasonable suggestions in the report, but a version that may at least be debated by the EU member governments some of which do not wish to see too much interference into their own regulatory framework and their financial sector). Even de Larosière’s realism may have been disappointed by the Ecofin yesterday.

But now the next round is open. Legislation on the European Financial Market supervision will be decided in a co-decision procedure between the Ecofin and the European Parliament.

Four MEPs set the tone
Yesterday, in an immediate response to the Ecofin decision, four MEPs, all members of the European Parliaments ECON-Committee and its respective coordinators for the political groups of the EPP (Jean-Paul Gauzès), S&D (Udo Bullmann), ALDE (Sylvie Goulard) and Greens (Sven Giegold) have set the tone. In a joint statement, they immediately criticised the ECOFIN's decision on the financial supervision.

They announce that the “European Parliament will not agree to water down the new European authorities” and ask the Council to stick to the Commission proposal of a European Systemic Risk Board in charge of macroeconomic supervision close to the auspices of the European Central Bank, as well as independent authorities, which should be equipped with binding and proportionate powers concerning micro supervision.

This quick reaction is symbolically strong. Such a cross-party move is rare. It may well be the start of months of conflict between the Ecofin and the European Parliament in the legislative co-decision procedure. So one hope uttered Mats Odell, Swedish Minister for Financial Markets and Local Government, may not come true: “I hope and trust that it will be possible to reach an agreement with Parliament in the first reading of this legislative proposal."

What the MEPs statement definitely shows is that there is action in new ECON-Committee. This is good news as the Committee has a lot of potential, the Parliament being involved in key legislative projects in the co-decision procedure.

Strong majority in the EP for the four parties
The four political groups (EPP, S&D, ALDE and Greens) have a vast majority in the EP. What will be interesting to see is whether the four co-ordinators, who are all either German or French, will be able to mobilize the British and Central and Eastern European MEPs in their groups. Yet it seems more likely that they will be able to construct a majority, than that they won’t. Especially as many MEPs are currently up in arms against the Council’s move to push through the SWIFT regulation on 30 November 2009 – the day before the Lisbon Treaty entered into force and would have transferred this legislative act into the Co-Decision procedure, hence giving the Parliament full participation in the legislative procedure.

But will the regulation on the European Supervisory Authorities then be one of the first legislative acts that end up in the conciliation committee in this legislature?

It is too early to speculate, given the fact that the first reading is only just about to start. What the Parliament can do in the next months is to play the matter back to the Ecofin for a new position which would go into a second reading.

The problem that might emerge for the European Parliament is time pressure. If it is true what the four MEPs write, notably that “European citizens are awaiting effective measures to prevent new crises” these same citizens may have little understanding for a confrontation between the Ecofin and the Parliament that, up to the second reading, may at least last into autumn 2010 leaving them without improved Financial Market supervision structures. So the EP might turn out to be slightly more cooperative than yesterday’s statement sounds, if the price is to go for months’ long procedures in the conciliation Committee.

For the Ecofin, it will be politically difficult to move, given the strong position taken by the UK against a strong EU supervision both within the Ecofin and publicly after the meeting. This will be all the more true should a Tory government be elected into office in May 2010 as is widely expected.

The Commission, in constrast, may mount pressure though and re-emphasize its initial proposals which the Ecofin watered down yesterday. What will in any case be interesting in January will be the European Commissioners’ positions on this matter. The statement issued by the four parliamentary groups gives an idea of the tone in the upcoming hearings of the likely Single Market Commissioner, the French Michel Barnier, and the proposed Finnish EcoFin-Commissioner, Olli Rehn. Both are likely to be questioned over the issue in the Parliamentary hearing. So is the Commission’s President Barroso who may feel he needs to position himself strongly given the fact that his last Commission was strongly criticised of being to lax on regulation issues.

If the Parliamentarians do not move away from the position they took yesterday and if they construct a majority against the Ecofin-proposal, the Finance Ministers may be surprised by the EP’s action. The Parliament’s opposition may even reach the level and attention it gained when stopping the first version of the Service Directive a few years ago.

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