CMV: The EU should adopt stricter financial regulations.

Sat May 19 2018 15:00:00 GMT+0000 (Coordinated Universal Time)


Clement Fontan

Göteborg University

Post-doctoral Researcher

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The recent financial crisis was a serious challenge for the EU’s political and financial leadership. Unfortunately, their response to the crisis indicates a tendency to protect banks over people. Between 2007 and 2009, EU authorities created billions of euros “out of thin air” to recapitalize the large banks that were on the verge of collapse due to very risky financial behavior. This led to increased levels of public debt, which in turn had severe socio-economic consequences for the citizens of many EU countries. In order to reduce public debt and regain investor confidence, many countries were forced to implement austerity measures – that is, to reduce public spending on things such as welfare, health care, and public security. This led to increased economic inequalities and, even more dramatically, to higher numbers of premature deaths across the EU.
One could argue (as the EU leaders do) that the cost of letting the banks fail would have been so high that such dire consequences are a necessary price to pay. Even if one accepts this argument, we would expect the regulators to implement the measures necessary to prevent another financial crisis in the future. However, the reforms of EU banking regulation that have presented so far fall short of expectations. While the creation of the Banking Union was hailed as a landmark progress for financial stability, it is less well known that in November 2017 the European Commission shelved its plan to meaningfully regulate the banking system. Rather than reversing the process of financialization, the main EU plan to increase growth is now to build a Capital Market Union, which basically amounts to supporting the very risky financial behaviour that led to the crisis in the first place.
In contrast to these developments, we would argue that the EU should protect its people before its banks. This requires meaningful financial regulation. Examples of meaningful financial regulation include measures to deleverage the banking system (that is, to reduce debt levels), to separate speculative investment from retail banking activities, and to implement a tax on financial transactions (including trades in complex financial products). Some of these measures have previously been on the agenda, but were recently dropped by EU leaders.
We believe that there are forces within the EU that understand the great dangers inherent in a runaway financial system, as we have described above. Our pledge is now that EU citizens support such efforts in the upcoming parliamentary election.

Background Information

  • In the wake of the financial crisis, EU officials have admitted that bank bailouts have “burdened taxpayers with deteriorating public finances and failed to settle the question of how to deal with large cross-border banks in trouble”

    • “The financial crisis has cost taxpayers a lot of money. […] We must equip public authorities so that they can deal adequately with future bank crises. Otherwise citizens will once again be left to pay the bill, while the rescued banks continue as before knowing that they will be bailed out again."
      - Michel Barnier (Former EU Internal Market Commissioner)

  • To ensure that in the future authorities will have the means to intervene decisively both before problems occur and early on in the process if they do, several proposals for new banking regulations and crisis management tools were adopted by the European Commission:

Further Reading

Taxpayer bailouts spur move to tighten banking rules

European Commission: Single Resolution Mechanism to come into effect for the Banking Union

Debate Summary

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