Europe’s Voters to Deliver Verdict on Financial Crisis Management

According to Reuters, pollsters are predicting that voter turnout for next week’s elections will fall – as it has done in every single one of the seven general European elections that have been held at five-year intervals since 1979. If this year’s falls below the 2009 level of 43%, critics are bound to raise questions over democratic legitimacy. However the European Commission (EC) points out that, while low in many cases, the figures are not dissimilar to those for local elections in many European countries. There has been a downward trend over the years but this is in line with a general decline in voting figures throughout the western democracies in recent decades.

This year’s European parliamentary election is the first since the global financial crisis, which caused the euro currency to teeter badly for a couple of years from 2010, and ushered in an era of painful austerity. So this election is a chance for the voters to deliver a verdict on how those in charge fared; and to select those to steer Europe into calmer economic waters.

According to the European think tank Open Europe – an organisation started by UK business people advocating European reform – the EP is probably more influential than voters realise. While it cannot initiate legislation, it has influence over laws proposed by the EC and reworked by individual member states. National governments, backed by the European Central Bank (ECB) and the International Monetary Fund (IMF), led the way in responding to both the financial and euro crisis but the EP did find a voice and a role in strengthening laws on financial market reform and Europe’s tentative banking union.

The State of the Economy: OECD Verdict

While issues such as immigration, national sovereignty and the related tussle of an ever closer, more integrated European Union (EU) might fire popular imagination and sharply differentiated political debate, it is the state of the economy across Europe which will be the key determinant of how the EU is viewed in the long run.

As voters were weighing up their choices early this month the Organisation for Economic Cooperation and Development (OECD) released its latest economic forecast. The OECD reported that the global economy was strengthening, although significant risk still remains. The news was brighter for Europe in particular. OECD secretary- general Angel Gurría said: “With the world still facing persistently high unemployment, countries must do more to enhance resilience, boost inclusiveness and strengthen job creation. The time for reforms is now: we need policies that spur growth but at the same time create opportunities for all, ensuring that the benefits of economic activity are broadly shared.”

Among the world’s major advanced economies, the euro area is expected to see a return of positive growth after three years of contraction with figures pencilled-in of 1.2% in 2014 and 1.7% in 2015. That puts it ahead of Japan but behind the US, which is projected to grow by 2.6% in 2014 and 3.5% in 2015.

Yet it would be naïve to think that all was well. Greece hurt first and is hurting longest. The country managed to raise
a €3bn five-year bond
last month at a yield of 4.95%, but its unemployment rate is at an eye-watering 27.1% and economic output has shrunk by a quarter since the start of the crisis. No wonder the government wants further debt relief talks.

Greece hasn’t been alone in needing a bailout since the onset of the crisis. Spain, Portugal, Ireland and Cyprus all needed emergency support from the EU and the IMF. Spain’s rescue was different, involving only the ECB offering €100bn of support to its collapsing banking system, although only €41bn was drawn down. Portugal plans to exit its three year EU-IMF bailout this month and is following Ireland’s and Spain’s example of doing so without a precautionary credit line, which means returning to the money markets unaided.

These countries were, in essence, locked out of the financial markets at the height of the eurozone debt crisis. Portugal’s imminent clean break seemed unthinkable just six months ago, but falling bond yields, an improving economic climate and the southern European country’s progress with budget consolidation have all helped and paved the way for its return to the market in April selling €750m of 10-year debt. Spain and Ireland left the emergency ward during the fourth quarter of 2013. Greece and Cyprus are still in bailout.

With financial fragilities persisting in Europe, the OECD said that it is urgent to improve the health of the region’s banking sector, complete the establishment of a fully-fledged banking union and sustain momentum for further reforms. It added that reliable estimates of the capital needs of banks were still required, followed, if necessary, by swift recapitalisation. Additionally, in a warning that could have had the upcoming European elections firmly in mind, Gurría added that complacency by policymakers and a “crisis of trust” in politicians, banks and multinationals were the biggest risks to the global economy this year.

However, while the worst of the crisis may be over for sovereigns many argue that the new world for corporates is not a good one. The remedies over the past few years mean that the banks have stopped acting as banks. Magnus Lind, chair of the Treasury Peer network, expresses a general concern about the direction of some policies: “When I talk to treasurers in the EU they are not that impressed with the policies that have been implemented. They are encountering huge problems. The biggest of these is the way that the banking sector, against its own will, has become overregulated and bureaucratic – so much so that corporate treasurers are asking about the long-term relevance of the banking sector for them.

“Banks are not doing what corporates expect them to do: selling them loans. We now have a corporate sector that lacks funding because the banks are regulated to invest in sovereign bonds.”

Disputed Market Reforms

The EU would argue it is innocent of the OECD charge of complacency. It says that the financial and eurozone crisis “revealed many systems and financial regulation as unfit for purpose” and “it has become clear that the management of national economies and financial markets needed wholesale reform”.

These crises coincided with the EP’s acquisition of new powers. According to the EC: “Parliament was active on all fronts. It pushed for ambitious legislation, often against numerous vested interests bent on maintaining the status quo or limiting reforms as far as possible.” The EC claims success, which includes “the introduction of a system that ensures taxpayers will not have to pay for banks in trouble, stronger and accountable financial sector supervision, bankers’ bonus caps, a ban on highly speculative credit default swaps [CDSs] and more accountable economic governance”.

However one man’s reform is another man’s needless interference in markets that will either do little good or actual harm. The proposed Financial Transaction Tax (FTT); the cap on bankers bonuses; and rules on derivatives are all cited by the EU’s critics as prime examples of the wrong way to tackle a problem. Criticism that reforms are poorly implemented, unrealistic or unnecessary adds to the popular perception across Europe of a remote unaccountable Euro elite. It is just such a perception that is expected to boost far right, anti-EU parties in many member states including France, the Netherlands, Hungary and the UK.

Bodies such as the European Association of Corporate Treasurers (EACT) have been working hard to try and make the legislation workable, commenting, for instance, recently on the European Market Infrastructure Regulation (EMIR), the EU’s bid to improve transparency and reduce risk in the derivatives market, especially the impact on non-financial entities. According to the UK’s Association of Corporate Treasurers (ACT) all derivatives outstanding on 16 August 2012 and executed since then will eventually have to be reported.

Earlier this month, 10 member states agreed to implement the FTT levy by 1 January 2016 although many details – including which financial instruments are included – still remain to be hammered out. The 10 state deal promptly caused the UK chancellor George Osborne to threaten another legal challenge – and this time the UK could be joined by Sweden in asking judges to intervene.

Equally contentious is the cap on bankers bonuses introduced by the EC, included among a slew of other regulation in the capital requirements directive, known as CRD IV. Much to the fury of some European MEPs, banks are sidestepping the cap by altering remuneration structures while the British government virtually cheers. More legal action is threatened, but not before Europe votes.

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