EU institutions set to clash over banker bonuses

Πηγή: New Europe
By PETER TABERNER
Nov 18 2012

The European Council and Parliament are set for showdown talks on the 20 November due to their disagreements over the capping of bankers’ bonuses following the ECOFIN meeting.

MEP’s have come out in favour of ratio of 1:1 between the level of bonuses that can be paid compared to the full salary over a year, Michael Barnier the commissioner for the internal market has backed the MEP’s in saying that member states should soften their stance towards them, and has asked for a compromise to be found.

Sources at the Parliament have also said that a middle ground is the most favourable outcome over the issue, and hope that the 20 November meeting will lay the groundwork for a deal to be brokered.

It is expected that negotiations between both parties will continue after the first meeting, with the imbroglio resolved hopefully before the 4 December ECOFIN meeting that will be the last one of this year.

The Council say that they do not necessarily disagree with the cap, but wish to implement a deferral principle, where bonuses that are over the 1:1 ratio within a financial year can be passed over, and then paid within a five year period.

If bonuses amount to being over the proposed ratio then the Council say that they be should be capped at 300% over a year’s salary, although this can be extended to 500% if there is a majority vote of over half of company shareholders decide to increase the cap.

The advocated single supervisory mechanism (SSM) was also discussed at the ECOFIN meeting, where the ECB will have an overseeing role over all Euro zone banks while in close cooperation with national banking authorities.

Negotiations are continuing on how the SSM will affect non- Euro member states of the EU that will sit on the outside of the SSM, but still wish to maintain strong links with the supervisory system.

An EU official said : “This is still in the negotiating phase and there will have to be a lot of creative solutions to be discussed between now and the 4 December at the next finance minister’s gathering. Non-euro member states must have to accept that they will not have the right to vote on supervisory decisions.”

“It will be a system where the making of difficult choices will be made by the governing supervisory body, the non euro states who still have ambitions to join the euro will be safeguarded from conditions becoming too difficult to be included in the future.”

Any decision taken on this issue will require unanimous support from the ECOFIN meeting next month.

To meet the end of year deadline meetings continue over the “Basel II” agreement, approved by the G20 in November 2010, and concluded by the Basel Committee on banking supervision in line with articles 114 and 53(1) of the Treaty on the Functioning of the European Union. Focusing respectively on the functioning of the internal market as agreed by the Parliament and Council, and the liberalisation and mutual recognition of professional qualifications.

The vision is to rearrange two legislations into law adhering to “Basel III” from the “CRD 4" package, that aims to amend the EU's rules on capital requirements for banks and investment firms. They are a regulation establishing prudential requirements that institutions need to respect, and a directive governing access to deposit-taking activities.

Also discussed was the common resolution authority and a common deposit guarantee scheme, in line with the pledge at the October ECOFIN meeting that both legislations’ legal framework will be decided by 1January next year, the Council say that negotiations are progressing well and hope to meet their deadline.

The European Banking Federation (EBF) has kept a close eye on developments this week, A spokesperson said: “Given that the Basel Committee (BCBS) is finalising its adjustments to the Liquidity Coverage Ratio , it seems wiser to wait for the final version before setting the details lest the EU applies different criteria to other jurisdictions. We would highlight two issues of great importance to the EU economy, the run-off factor envisaged in the BCBS for retail customers should be applied without further restrictions, for example to all individuals regardless the amount of the deposit and to all SMEs with a turnover of less than EUR 50 million.”

“We have consistently advocated strong support for the single rule book in order to create a level playing field for EU banks and reduce their heavy administrative burden. Our ultimate aim is the creation of a true single market in financial services, not the fragmentation of the financial services market. Strengthening of the single market in financial services via further supervisory integration in the European Union is a main priority for the EBF, and the proposal for a Single Supervisory Mechanism under a Banking Union is a vital step in that direction.”

The EBF would adhere to more of what the European Council is proposing for bankers’ bonuses, with companies having the right to decide on pay and approve remuneration schemes. Any further restrictions that are suggested should not be too draconian, as that may drive away talent and imbalance a global market.

“We think that the objectives pursued at International level and the European Commission, namely ensuring that remuneration schemes are more strongly integrated components with a long-term incentive effect and appropriate risk character, in order to ensure that excessive risk-taking is not encouraged, are right from a risk perspective.” The spokesperson added.

Merkel Is Wrong About EU Fiscal Regulation

Πηγή: Foreign Affairs
By Erik Jones

Jan 12 2012

 The Case for a Sovereign Credit Club  

The conventional wisdom -- of which the German government is the strongest proponent -- is that European sovereign debt markets are in crisis because Europe's leaders failed to enforce their own rules on macroeconomic policy. Last March, members of the eurozone agreed to a "six pack" of measures that would help states better coordinate policymaking. But the move failed to solve the problem, so German Chancellor Angela Merkel is pushing a new fiscal compact to save the union, and the currency. Member states would write balanced budget provisions into their national constitutions, and the European Commission and the European Court of Justice would act as the enforcers.

The problem is that this new approach assumes that compliance is a matter of enforcement. But that reasoning ignores the role of incentives -- the adjustment of which is the only way the European Union will be able to navigate a way out of this fiscal mess.

Two stories illustrate the difference between enforcement and incentives. First, consider Ireland. The tale begins with the country's commitment to the European Union in the spring of 2000 to increase its budget surplus (note: surplus, not deficit) to slow down the economy, which seemed to be overheating. At that point, the Irish government was already taking more money out of the economy in taxes than it was putting in through spending; increasing the surplus would mean siphoning off even more. Looking ahead to spring 2001 elections, however, Bertie Ahern, then Irish prime minister, decided to lower the surplus instead by reducing the tax burden on the Irish population. When the European Union's council of Economic and Financial Affairs (ECOFIN) reprimanded his government, Ahern told his European colleagues, in so many words, to mind their own business. He was not opposed to European coordination, but he was not about to raise taxes before an election.

The second story concerns Germany. Berlin was the player that had originally insisted on tightening the rules against running excessive fiscal deficits -- in the form of the 1997 Stability and Growth Pact. But as the German economy sputtered in the run-up to the 2002 elections, German Chancellor Gerhard Schroeder was reluctant to meet his solemn obligations and rein in his country's finances. Even after eking out a narrow victory, Schroeder saw few reasons to be more fiscally disciplined. By November 2003, Germany's deficit had grown too big for the rest of the eurozone to ignore. The European Commission recommended pushing Germany to reduce it or face sanctions for failing to live up to its obligations. Since France and Italy were experiencing deficit problems of their own, the German government was able to work out a plan with them to hold the enforcement rules in abeyance. The three countries blocked the Council of Ministers from forming the working majority needed to create legally binding fiscal commitments.

"Some might complain that the Greeks are not doing enough to rebalance their economy, but no one can deny Athens' willingness to cut deeper and deeper at every turn -- mostly to escape the risk of being kicked out of the monetary union"

The Irish and German cases reveal that the problem is less enforcement and more the influence of perverse incentives. The Irish government had little incentive to follow the fiscal rules. That much is obvious. But the rest of Europe had little incentive to enforce them, either. The ECOFIN Council's February 2001 reprimand of Ireland came just as the Irish people were preparing to ratify amendments to the EU treaties that delegates had agreed to in Nice the previous December. Those amendments raised a host of concerns in Ireland -- ranging from worries about what greater market competition would do to the economy to the future of Irish political neutrality. The ECOFIN Council's harsh words only added to the tension. When the Irish electorate voted down the Nice Treaty the following June, Ireland's European partners rushed to soothe frazzled nerves. The ECOFIN Council, taking advantage of new economic data, decided that Ireland no longer needed to live up to its commitment to running a higher surplus. The whole episode was quickly forgotten.

Germany's intransigence came to a similar resolution. In July 2004, the European Court of Justice ruled that once the Council of Ministers admitted that Germany had a problem, it no longer had the authority to hold the European Union's procedure for handling excessive deficits in abeyance. But neither the European Commission nor the other plaintiffs in the case felt it prudent to pick a fight against the eurozone's strongest member. Instead, they decided to work with Germany to ramp up existing efforts at market liberalization and welfare reform. In fact, rather than tightening the rules, the commission offered up plans to loosen the Stability and Growth Pact to allow Eurozone members even more leeway in how they balanced their budgets, or did not.

In short, Europe's macroeconomic policy coordination failed because countries faced strong incentives to renege on their commitments and the ECOFIN Council faced equally strong incentives to let them get away with it. Any attempt to sanction Ireland in 2001 would likely have exacerbated the Irish public's sour mood. And any attempt to compel the German government to live up to its commitments would only have revealed the European Union's inability to force member states to bend to its will. Because of domestic concerns, Berlin was not going to budge.

The measures currently on the table will not change eurozone dynamics. The European Commission and the European Court of Justice will never be eager for a showdown with a powerful member state. And the new provisions under debate will not fix the problem, either. At best, member states will agree to require a supermajority in the ECOFIN Council to waive sanctions (now, a supermajority is needed to impose them). And even that requirement will only be credible once it is tested against a core state such as Germany or France. Where constitutional commitments of fiscal discipline are concerned, the outlook is not much better. National laws contain loopholes; constitutional amendments can be revised as easily as they were introduced, and their enforcement depends on the good will of national courts.

But there is a solution. A better approach would be to focus on incentives rather than enforcement. Consider, for example, the cases of Latvia and, believe it or not, Greece. Latvia has undertaken a painful macroeconomic adjustment since 2008 because it believes every alternative, especially being forced to give up its fixed exchange rate with the euro, would be worse. A weakening domestic currency would cause energy prices to rise, greatly increase the burden of foreign debts, and make it difficult for Latvian monetary authorities to reestablish credibility.

Some might complain that the Greeks are not doing enough to rebalance their economy, but no one can deny Athens' willingness to cut deeper and deeper at every turn -- mostly to escape the risk of being kicked out of the monetary union. The Greek government recognizes that leaving the euro would provoke a major crisis in the country's banking system, spark a significant increase in both import prices and domestic inflation, and would do little to improve the country's competitiveness.

What Europe really needs is a regime that incentivizes staying inside the monetary union and cracking down when partners break the rules. A good analogy is a stock exchange. Firms join because they get access to low-cost capital. And they are willing to open up their books and accept certain performance standards in order to do so. By the same token, firms are banished that refuse to play by the rules.

The European Union could create a similar dynamic by establishing clear conditions that member states must meet to get access to low-cost and jointly underwritten sovereign debt financing -- call it a sovereign credit club. The precise conditions would be negotiated, but the main point would be that any government that fails to abide by the rules would find itself out in the cold. Should Greece, say, join the club then try to default on its debts, it would lose the right to financing until it compensated the group. Meanwhile, partner countries would have every reason to hold one another to the highest standards because the creditworthiness -- and so the cost of borrowing -- of the club would be influenced by the creditworthiness of its weakest member.

Finally, this arrangement would not put EU institutions -- the European Court of Justice or the European Commission -- in the untenable situation of imposing sanctions that they cannot enforce. As it is now structured, the European Union has every reason to keep countries in the single currency and few to force them to coordinate macroeconomic policies. Unless it rebalances these incentives, efforts to enforce the rules will not amount to much. But if membership has its privileges, then the union would solve itself.