Letter from... Brussels

Jeremy Woolfe on the effectiveness of Europe's Financial Services Action Plan

The woman buys the dress. In London, she’s size 10. If she were in France, it would be 42, and Austria 40. For such dress fits across Europe, any irritation is minor. But for investment, European capital markets working with different regulations in different countries spells economic malaise. If cross-border investors don’t know the rules, they won’t have confidence. Sclerotic capital markets, with money-flow blocked at the borders of the 25 EU countries, rots industrial growth. It undermines employment, nurtures social misery.

Put it another way. The entrepreneur comes up with a “brainwave”. Toasted bread with yeast flavoured paste, healthy, and good for franchise kiosks in every major city. Feeble idea? But suchlike propositions do get financial support, as long as the firm is not setting up its HQ in Europe. To succeed, as a company outside the major internationals, you’d be better off somewhere like New Jersey or Connecticut, where you can tap into the New York money market.

In the late 1990s Europeans, envious of US access to world capital, worked on a solution. Their brainwave was to bring in togetherness across the EU for such as corporate governance codes. Sectors to be covered, step-by-step, were to include: the modernisation of EU securities and derivatives markets; auditing standards; capital adequacy rules for banks and insurers; codes of management for the corporate hierarchies; rules for cross-border money transfers; pensions regulation; tax laws; markets in financial instruments (MiFIDs); and so on.

Developed by a team under the chairmanship of Professor Alexandre Lamfalussy, the economist, it put together the “Financial Services Action Plan” (the FSAP). Laborious work has gone into its evolution. Efforts accelerated in the aftermath of the Enron-WorldCom-Parmalat-Ahold scandals. Today sees some in place - for instance, the IFRS corporate accounting standards regulation, operating since 1 January 2005.

Most other legislation in the package has now been drafted to the necessary standards. The Internal Market Commissioner, Charlie McCreevy, is now seeking a no-nonsense approach to implementation into EU Government rule-books. McCreevy warned, at the launch of his green paper last summer, no “gold plating”! (By this, he argued against national governments “mushrooming” the legislation by adding “layer upon layer of regulatory additions”). The white paper, the action plan for up to 2010, was expected to be on substantially the same lines as its predecessor.

Optimists would have one believe that the FSAP’s sun is already breaking through the grey economic clouds. Capital markets in the EU are already getting more liquid, they say. The “pre-emptive” effect of the forthcoming Basel II rules, refining the needs of capital adequacy for banks, is already leading to upgrades. Capital is beginning to circulate more freely through the 450m-population economic zone.

But the hard task of getting 25 countries - many of which still nurse memories of previous wars with each other - to conform generally over FSAP will not be so easy. Solvency II’s programme for insurance is a feeble example. Any proposed directive keeps slipping into the future. People openly laugh at the official (European Commission) line, that there’ll be a Directive at least by 2010… hold back! Not so soon, they guffaw.

Eventually, the story of the FSAP could become a major, unsung triumph. At best, estimates for its prospective contribution to economic growth range between 0.2% and 0.3% improvement per year. Sunshine indeed!… especially against dismal performance for 20 years.

However, even when the whole set of Directives now on the road to being implanted actually gets enacted in national legislation, there will be another hurdle. That will be enforcement. In financial matters, too often the EU countries pay lip service, then they flagrantly go their own way. Germany, France, Italy and so on running government spending deficits in breech of the Stability and Growth Pact to underpin the Euro is one flagrant case. Nations subsidising their native airlines (Italy and Greece) is another. Who’d bet on those countries sticking to the new banking rules? Or much else of the FSAP?

Jeremy Woolfe is a journalist based in Brussels.