Over the past few months, the European institutions have placed the regulation of banks as their primary target.
It’s not difficult to understand why. Politicians and citizens alike have placed the activities of some banks as the key reason behind the crisis itself.
Regulating the activities of banks, however, is not an easy thing to do. For it to be fully effective, it has to be done on a global basis; a matter nearly impossible in today’s world. However, at European level, there have been some serious advances over the past few months; firstly, with the Financial Transaction Tax and now with a provisional agreement to limit bonuses throughout the banking sector.
On the 28th February, a provisional EU agreement introduced what would be the world’s strictest pay curbs on bankers’ bonuses. In simple terms, the proposal aims to limit the automatic cap on bonus pay-outs of bankers to the level of their salaries.
This change of law comes as part of a wider body of legislation aiming to create a stronger, yet safer European financial regime. Other aspects of the legislation package demands banks to set aside roughly three times more capital, as well as outline profits and other details of operation on a country-by-country basis.
Reduce risks or boost competition?
It is clear that politicians hope these announcements—alongside the financial transaction tax—will sooth public anger towards the financial sector. The logic is quite straight forward. As Ernst Stetter, secretary-general of the Foundation for European Progressive Studies, says: “It is no longer acceptable that banks report huge losses whilst at the same time dish out very generous bonuses.” It is an attempt to try and change the overall behaviour of banks regarding the previous actions of some of their employees; the logic being that the potential to receive large bonuses encourages traders to make riskier activities.
The proposal, however, has received three main criticisms. The first criticism was well summarised by the Conservative London Mayor, Boris Johnson, who predicted that “the most this measure can hope to achieve is a boost for Zurich and Singapore and New York at the expense of a struggling EU”. It is also argued that it will be ineffective as banks would still be able to increase the basic salaries of their employees. The third main criticism is that caps on bonuses will only make it harder for bankers to punish non-performing bankers, as basic pay cannot be clawed back in the event of losses.
Whilst everyone seems to have an opinion on the matter, no one seems to be able to convincingly, respond to each and every comment made.
As such, because it is very difficult to predict the outcome of a policy aiming to affect behaviour, any opinion can only really be based on our inner beliefs of what is the right way forward for society, or not. The reality is that the curbing of bonuses has strong chances to have negative effects on our economy. Yet can we really afford to not act against the deplorable behaviour of some of our banks?
A recent statement by Vicky Ford, a British Conservative MEP and one of the European Parliament’s chief negotiators on this directive, managed to express the views of most politicians and citizens in Europe when she said: “We may not have got this 100% right but I hope it is a step in the right direction.”
Cameron’s tricky position
Beyond the economic and social debate, as important as it might be, there is the much broader issue regarding the power relations between the UK and its European partners.
Following a meeting with other European leaders in Brussels on 5th March, it is understood that Britain was left isolated 26 to 1 and, thus, failed to significantly water down the rules regarding the capping of bankers’ bonuses as they had wished to do.
British Prime Minister, David Cameron, is in a tricky position. On the one hand, the UK is responsible for 40% of the EU’s financial services and would thus—from a national perspective—wish to keep its competitive advantage. Yet on the other hand, in the current climate of distrust towards the banking industry, the British government cannot be seen as refusing to act against the execrable behaviour of some employees in most banks over the years.
The strong rebuttal of the British position by the other EU leaders could well be in response to the veto David Cameron has recently used in a EU summit and his overall Eurosceptic and populist approach to European Affairs over the past few years. This is confirmed by Martin Schulz’s comments that although “one state has severe difficulties with the agreement…the EU must press ahead and get this important legislation on the statute book.”
Michel Barnier, the European Commissioner for Internal Market and Services, strengthened this viewpoint when he stated that it is “crystal clear” that the cap would go ahead.
Schulz’s and Barnier’s positions are clear: they will no longer accept that the UK slows down the EU decision-making process. The rebuttal from the 26 other European leaders supports their view that Europe must continue to act and not allow the UK to restrain it from taking the reforms it so necessarily needs.
There has also been strong criticism in Britain regarding the result of David Cameron’s strategy with regard to this new legislative proposal. Indeed, Arlene McCarthy, Labour MEP and vice-chair of the European Parliament’s economic and monetary committee, argued that “yet again, we have an example of the government’s failure to proactively engage in and influence EU policy in Britain’s national interest.”
Although this proposal would only need a qualified majority in the European Council to pass, it is believed that many in the Council wish for an agreement by consensus and hope to agree to some “technical modifications” in order for the UK to accept the overall proposal. It is expected that the UK would be willing to negotiate on some technical aspects, especially those regarding an increased deferral of payments and a 6 to 12 month postponement of the implementation of the law.
Following the British government’s increasing euroscepticism, it is interesting to see that the other European leaders, as well as the European Parliament, have decided to take such a strong stance in what is a highly sensitive position for the UK. As a result, the UK is expected to agree to only slight technical modifications to the proposal, rather than the changes they might have previously wished for.
This could be seen as a demonstration that Cameron’s eurosceptic strategy has backfired and that instead of ensuring that the UK has an influential voice in the “capital investment” debate, he has in reality weakened the country’s position in Europe. It also shows an example of how the European institutions may be willing to act if David Cameron continues to press on with such a eurosceptic line.