Merkel stays mute on market reforms

There are conflicting views about the incoming German presidency of the EU’s likely impact on financial services policy.

"We have, for the most part, passed the time when we should be expecting big new initiatives," says a Brussels consultant on financial services.

But a German banking specialist disagrees. There are, he says, only a couple of brief references to financial services policy in the official document outlining the German presidency’s priorities and they are too little and too vague.

"It will be 2019 before Germany has the EU presidency again. The government has not used the opportunity it will have in the next six months to give intellectual leadership to the debate about financial services policy," he says.

Chancellor Angela Merkel, he argues, has been presented with a document reflecting the bureaucratic consensus but has let slip the opportunity to put her stamp on it.

In broad terms, Germany’s economic priorities for Europe are clear. With the German economy in better shape and its budget deficit finally coming under control, it has a platform from which it can try to promote more effective economic policy management at EU level.

This will mean, for example, trying to make better use of the process of examining the stability and convergence programmes of the 27 member states of the enlarged Union. The goal will be to encourage them to use the ‘good times’ of the current economic upswing to get budget deficits under control and better prepare for the looming demographic shock.

But it is in the field of European financial market integration that, critics say, the German government looks like being too cautious.

A number of issues are moving through the pipeline. A new capital adequacy regime for insurance companies (Solvency II), for example. An agreement needs to be reached quickly, too, on some leftovers from the Finnish presidency. The Payments Services Directive (PSD), which forms the legal underpinning of the Single European Payments Area (SEPA), is one item. If SEPA is to be advancing by 2008 and fully up and running by 2010, the PSD needs to be cleared in a first reading, and that has to happen in the Parliament in the next few months. But fundamental divisions on a few key issues mean it is now stuck in the Ecofin Council. The Finns failed, so can the Germans unstick it? The acquisitions directive on cross-border financial sector mergers is facing similarly tight deadlines, albeit amid reservations about its likely impact on cross-border restructuring.

A question mark hangs, too, over how the presidency will handle the rumble of discontent in the banking sector in response to Internal Market Commissioner Charlie McCreevy’s brave, but risky, attempt to use a voluntary code of conduct to address the vital restructuring of Europe’s fragmented securities clearing and settlement system. This question is related to the highly controversial intervention of the European Central Bank (ECB) into this arena through its proposed Target 2 Securities settlement system. Member states are going to have to agree on how the voluntary code should be implemented and monitored and, informally, whether the ECB initiative should be encouraged.

And as early as February, the Commission’s Inter Institutional Monitoring Group’s interim assessment of the Lamfalussy process for promoting financial markets integration will appear. This is likely to pose the question of what can be done to speed up the process through which financial market regulators in individual countries co-operate. Closer co-operation is vital, not only in terms of laying the foundations for deeper financial market integration in the medium term, but, more urgently, for addressing the glaring inadequacies of the EU’s still predominantly nation-state based financial crisis management structures.

What is missing from the German presidency’s initial statements, critics say, are clearer signs of Germany’s views on, for example, the development of EU-wide mortgage markets, especially mortgage funding, and on promoting the growth of private sector pensions on an EU-wide basis. Missing too are the presidency’s views on how to respond to the signs that the US administration and Wall Street want to reshape America’s financial market regulation to make it more principle-based like Europe’s. Is this an opportunity for promoting the closer transatlantic economic integration that Chancellor Merkel favours? Is it a competitive threat to which Europe must respond? Or is it both?

There are conflicting views about the incoming German presidency of the EU’s likely impact on financial services policy.