Objectives of the financial services action plan
If God, Niccolò Machiavelli, or Isambard Kingdom Brunel had designed the single European market they would now be standing in the corner with a dunce's cap on. Financial services, which should be at the heart of the single market and the engine of pan-European growth, are still stuck behind national barriers. It is as if the launch of the single market in 1992 and the introduction of a pan-European currency in 11 countries this January have added nothing to the quality of services that retail consumers or even the average company can enjoy.
The problems have been protectionism - a fear that once the floodgates are open the Anglo-Saxons will dominate financial services - turf wars within the European Commission, and turf wars between the 15 member states. The enemy has been the time it takes to draw up and refine European legislation, or a common code of conduct, and then enforce it.
It's impossible to have a pan-European bank account. Retail bank charges for intra-euro business are still excessive - conversions between components of the euro average 5.5%, and cross-border transfers 8.4%, according to Christa Randzio-Plath, chair of the European parliament's economic and monetary affairs committee. Fund managers in most countries are protected from foreign competition - by tax laws and conduct-of-business rules.
ABN Amro has been trying for years to establish a bank account usable across Europe. "Technically it's possible, legally it's an enormous problem," says Jaap Kamp, head of ABN Amro's EU (European Union) liaison office in Brussels. "Registering is difficult, there are different reporting requirements, there are different set-off and bankruptcy laws and solvency ratios." This sort of thing wasn't discussed when Europe went headlong into monetary union, Kamp says.
Precisely because of the euro, and the rapid development of electronic commerce, these national barriers have become a huge irritation. A pan-European company, for example, such as Shell or Unilever, has to run 15 separate pension funds for its employees, because of variations in tax laws between the EU states.
For years since 1992 countries anxious to preserve their retail savings base have pussyfooted around single-market measures, invoking special treatment for cultural reasons or the great fallback argument that such-and-such a measure would interfere on their home turf with "the general good".
Wholesale markets were also trapped behind national barriers. But the advent of the euro largely eliminated the technical obstacles to a wholesale market spanning at least 11 if not 15 countries. Already there is one euro money and capital market whose common dynamic is credit and liquidity. Only legal obstacles remain before this business becomes freely cross-border, for example uncertainty about title to collateral, bankruptcy and set-off, variations in takeover codes, and a huge row about tax harmonization.
The European Commission in Brussels, divided into its 42 (now reduced to 36) directorates-general (DGs) and services, was late to recognize the need for urgent action to perfect the wholesale market, and to begin the work of creating a cross-border retail market. Mario Monti, until July commissioner for the internal market and taxation affairs, had been preoccupied by taxation until early 1998, a year from Emu. Yves Thibault de Silguy, commissioner for economic and financial affairs, and by many accounts a lightweight, showed a little more foresight on the macroeconomic side, harnessing the expertise of the private sector, represented by the Giovannini group, to ensure that at least the infrastructure of payments and settlements worked from day one of Emu.
In early 1998, with the UK assuming its six-month presidency of the European Council, the directorate-general for internal market and financial affairs (DG15 - although the commission has stopped using numbers and prefers to use names) began to draft what it called a "framework for action". This was an attempt to draw together all the pieces of EU legislation and guidelines on financial affairs (57 financial affairs directives have been passed so far), all the work that was pending, and fit them into a coherent future plan, with a timetable, deadlines and priorities.
Knowledge from the coalface
DG15 set up its private-sector financial services review group, which included - horror of horrors - experts from US investment banks. Why should American bankers have a say in the creation of the European single market? Certainly that question was asked in Brussels. But the overloaded staff of DG15 insisted they needed knowledge from the coalface on such things as use of collateral, the function of wholesale markets, exchanges and clearing-houses, use of derivatives and other details of the fast-changing markets. They were right. The financial services action plan bears the hallmark of people who know what they are talking about.
But DG15 had to be cunning. The decision-making process in Brussels demands enormous stealth and diplomacy. DG15 covers only some aspects of financial services. There is an overlap with DG2 (economic and financial affairs), DG4 (competition), DG5 (employment and social affairs), DG21 (taxation) and DG24 (consumer affairs). So by drawing up a comprehensive action plan DG15 is already treading on toes. Officially, the existence of turf battles between DGs is hotly denied, but they exist. DGs, unless they are careful, tend to operate in silos, sometimes ignoring the impact on the DG next door. DG15, for example, is furious with DG2 for releasing papers on bank supervision that "contain factual errors", according to one bank supervisor. DG15 itself was caught out some time back when it failed to spot the implications of an electronic data directive on the recording of dealing-room conversations: the European parliament had to scrabble together an amendment.
To keep its "framework for financial action" on track, DG15 in January 1998 set up a politically correct financial services policy group, chaired by Monti himself, sporting big names in finance ministries and supervisory bodies. The FSPG met four (and a half) times last year. Its members carried enough weight with their ministers to put financial services high on the agenda at twice-annual meetings of Ecofin (the council of EU finance ministers). Ecofin, according to DG15 officials, now "owns" the project, which means that EU finance ministers will exert peer pressure if any country appears to be dragging its feet on financial services legislation. The ultimate weapon is to put any unresolved grievance on the agenda of the IGC (inter-governmental conference) a meeting of EU ministers to discuss policy matters of the highest importance, such as EU enlargement.