Brussels, 26/10/2010
Executive summary and introduction
1. Two years after the crisis culminated in the collapse of Lehman Brothers banks, it is time to take stock of the action taken by governments to reform the global financial architecture and regulate financial markets.
2. Among many policy makers and financial market experts in Europe and the US, the view is still prevailing that the financial and economic crisis has resulted from a series of unfortunate, though interrelated mishaps in allegedly efficient financial markets. To overcome the current drawbacks, it would be sufficient to merely devise a few new rules and change some existing ones and the system could get back to normal. Accordingly, those same people warn against tighter rules that allegedly hamper future growth. To date, a huge armada of financial lobbyists has managed to successfully obstruct reforms of the financial sector that would genuinely overhaul its fundamental flaws and rebalance the world of finance with the needs of sustainable growth in the real economy.
3. Other politicians, albeit in a minority position, the ETUC together with the international trade union movement, many academics and civil society organisations have taken a different view, pulling together the different strands of financial reform, striving for a new and sustainable growth model of full employment and social justice that would reassign a commensurate role for finance in society and the economy. In its resolution of October 2009, the ETUC Executive Committee called on governments and the European institutions to ensure that the national, European and global regulatory architecture provides for a banking system that delivers stable and cost-effective financing for the real economy, thereby enhancing growth, stabilising macro-economic volatility, and allocating finance to socially beneficial use.
4. The crisis for banking institutions and their managers seems to be over. The huge bail-out programmes have not given rise to any more socially responsible behaviour in the banking sector but have in fact added to moral hazard and widespread self-service mentality. Reforms undertaken so far have been shaky and hesitant, the preliminary assessment of them is mixed at best and the outlook for future progress rather bleak. Reform steps have remained incremental.
5. The leaders of the G20 have not met their own commitments formulated at their meetings in London, Washington and Pittsburgh. The outcome of the June 2010 G20 Toronto Summit revealed not only different approaches to financial reform among the G20, moreover governments have given up a uniform agenda for the regulation of global financial markets. While the US approach has focused more on the size of financial institutions relative to the economy (“too big to fail”) to prevent further massive bail-outs financed by the tax payer, the Europeans have sought to raise capital requirements for banks in the framework of the Basel institutions (“Basel III”, to become effective in 2019), however with lacklustre resolve. Fundamental divergences among the G20 on monetary and fiscal policy, on financial sector taxation, on minimum capital requirements for the banking system, on derivatives and on hedge funds represent a major step backwards from their commitment in April 2009 to establish “much greater consistency and systematic cooperation between countries, and the framework of internationally agreed high standards that a global financial system requires”.
6. For the ETUC it is therefore even more important that European governments and institutions achieve consistently high standards of financial regulation both within the regulatory space of the European Single Market and the G20. In addition to five member states, the EU itself has a seat in the G20, and the ETUC will continue to actively take part in global trade union consultations with the G20. Tough regulations of financial institutions will make little sense when not pursued at the supranational level of the Single Market. For when one nation relaxes regulations, it sparks off a race to the bottom and harms all others by attracting foreign capital inflows, forcing the more regulated economies to loosen regulation and/or raise interest rates and lead banks to take more risk. Competition among EU Member States to attract financial investors and innovative financial products promising high rates of capital return is leading to a persistence of national caveats, thereby creating loopholes in a prospective EU regulation. The attitude of the EU Council runs counter to a truly harmonized set of core rules in the EU, mounting obstacles to creating both a single European financial market as well as a level playing field against regulatory arbitrage. When it comes to the transfer of executive power from Member States to the European level, one can observe the re-emergence of the traditional clash between a nationally oriented Council, a pro-active European Parliament and the Commission acting cautiously with regard to the Council. The ETUC strongly supports the European Parliament which is at the forefront of financial regulation in the EU, whereas the Council has sought to water down substantially the proposals that are on the table.
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