Europe: a continent with principles

Back in the late 1990s, a triumphalist America, briefly perhaps the world’s sole ‘superpower’, could not resist the temptation of proclaiming that, in order to foster prosperity and global financial stability, nations should adopt, or mimic, its basic approach to regulating financial markets.

I vividly remember Larry Summers, who was soon to replace Robert Rubin as US treasury secretary but who at that time was still his deputy, beating this drum on the eve of what became the most dangerous world financial crisis of the post-war era. The world was "now in the process of trying to replicate at global level the types of safeguards against risk that have been so important to growth in the United States," he said in a speech in June 1997.

"It is hard to over-emphasise how important a factor transparency is in bringing problems to the light of day before they become serious.

The development of the US Generally Accepted Accounting Standards (GAAP) and the disclosure requirements in the securities laws were critically important to the development of US securities markets."

Nemesis began to arrive just a year later, first in the shape of the calamitous collapse of the Long Term Capital Management hedge fund and then, in 2001, with a succession of accounting and fraud scandals, such as the collapse of energy giant Enron, which suggested that US GAAP were not all they were cracked up to be.

Fast forward to 20 November this year and a speech at the Economic Club of New York by the current US Treasury Secretary, Hank Paulson. Drawing on the recently published work of the high-level committee on capital markets regulation, the Paulson Committee, he warned that US capital markets were becoming less competitive internationally. Among other things, he lavished praise on accounting standards - the International Financial Reporting System (IFRS) - which have been promoted most actively by the European Union.

Paulson put his finger on the vital issue. IFRS, he said, are principles-based, rather than rules-based. The key differences, he maintained, were that US rules-based systems could lead to a "box-ticking" mentality, might not be flexible enough and could result in excessive regulatory burdens and degenerate into behaviour which puts a premium on fulfilling the letter of the law, rather than its spirit. America’s multiple and overlapping banking and financial market regulatory structures suffered, he suggested, from a similar "box-ticking" approach. The legal system, too, with its massive payouts to compensate injured parties and huge fees for their lawyers, was also damaging American competitiveness.

Paulson wants reforms. But as David Wright, director at the Commission’s internal market department, explained at a conference last week at the Centre for European Policy Studies, getting them may not be easy. These legal, accounting and regulatory structures are deeply embedded in America’s political culture.

When the EU-US transatlantic regulatory dialogue on financial market issues began earlier in the decade, EU participants sensed that their American interlocutors were patronising them. Not any more. Flexible EU accounting and regulatory approaches, based on principles, not rigid rules, are better suited to a globalising world economy. Of course, even within the EU itself, there are still enormous implementation problems. We are a long way from getting EU member state banking regulators to co-operate effectively for example. But the EU’s principles-based models will be adopted more readily around the world than US equivalents, helping to strengthen the single currency and our capital markets.

So, when it comes to the EU-US financial market regulatory dialogue, Brussels is no longer on the back foot. In this field, too, Washington’s international prestige is waning. Whether its people and politicians can adjust to this transformation is an open question. My guess is probably not and certainly not quickly. This means that the reforms Paulson wants will not be forthcoming and that is bad news for American influence around the world, the US economy and the dollar.

• Stewart Fleming is a freelance journalist based in Brussels.

Back in the late 1990s, a triumphalist America, briefly perhaps the world’s sole ‘superpower’, could not resist the temptation of proclaiming that, in order to foster prosperity and global financial stability, nations should adopt, or mimic, its basic approach to regulating financial markets.