While our prime minister chooses to grandstand on the fringes seeking short-term headlines, the European parliament is working hard on the alternative investment fund directive. This is aimed at hedge funds, venture capitalists and others. The new EU supervisory authority proposed by the bill in the European parliament will have 72 new powers in this area. By far the majority of the European speculative funds are UK-based. While good investment is obviously a good thing for an economic growth, the asset-stripping speculative funds will be severely restricted – so they should be, they buy companies with money borrowed on the strength of the target company’s future profits, asset strip (ie. put no money into R&D and so on), and then sell the companies again to make a quick buck. This is the first time asset stripping has been addressed by the European parliament. Poul Nyrup Rasmussen, a ‘loony left winger’ (well actually a mainstream former Danish prime minister), was a lone voice campaigning on this issue in Brussels as if there were no tomorrow three years ago before there was any inkling the whole financial system may be in crisis.
Separate from this, four new bodies were agreed last October by the European parliament – their names make them sound like Harry Potter’s latest enemies. EIOPA (the insurance regulator – British Labour MEP Peter Skinner was behind this); ESMA (the European Securities Market Authority), EBA (the Banking Authority) and the ESRB (Systemic Risk) are acronyms to look out for in the future. They may save us all from financial meltdown when the evangelical believers in the free market next go potty with our money. When they are up and running they will have the power to carry out stress tests in their areas of expertise.
Despite the rightwing balance of forces in the current European parliament, it accepted the idea of a financial transfer tax (a tax on banking transactions) after a well informed French socialist, Pervenche Beres, chaired a cross-party parliamentary committee that reported on the financial crisis. The Global Progressive Forum and the party of European socialists are actively campaigning for an FTT. Crucially, the socialists believe that even if the world (the G20) do not adopt an FTT soon, then Europe should go it alone, and encourage others to follow suit.
Most socialists and progressives accept – even actively support – the success of markets.
However you look back at the crisis, the credit ratings agencies (Moody’s, Standard and Poor and the rest) have a key effect on the market – and in the case of Iceland or the US subprime mortgages, to name but two, the information they gave was dud. European socialists are looking into setting up a European Ratings Agency. Despite the support of the commissioner, Michel Barnier (incidentally, no socialist), the UK coalition government is opposed to this – perhaps not surprisingly, but the public needs reassurance we will not have the same problem again – and a reassurance there can be no conflicts of interest when markets act on their information.
Socialists are also very involved in the Basel III negotiations on the banks. This is crucial. Banks must have enough funds to guarantee the money they lend. They need a framework for counter-cyclical capital buffers, they need a leverage ratio, and so on. Again, look at the chaos in Ireland caused ,not by the fundamentals of the republic’s economy, but caused simply by the banks.
Further legislation is in the pipeline concerning the derivatives market and resolution funds.
As we went to bed at night during the height of the crisis two years ago, we now know that Darling and others feared the money in our bank balances could be inaccessible by the morning. The world financial system is based on credit which is based, in turn, on confidence. We must not let inertia and arrogance stop us from acting on the lessons of that crisis. The world financial system has had a warning shot across its the bows.
The financial crisis is an issue where we can hold our heads up high as progressives. Even Gordon Brown’s detractors recognised his strengths as he travelled the world in an urgent response to the financial crisis, as he prepared for a very successful G20. The rightwing have what amounts to a religious belief in the ‘hidden hand’ of the market, looking after all financial transactions like a guardian angel. Why is it a ‘hidden’ hand? Because it is not there. Most of us can see the advantage of a market, but like a game of football needs a referee, markets need rules.
We – particularly the UK – survive in a financially interlinked world. Of course we need international legislation to regulate finances, otherwise financial organisations would simply leave the UK. Bankers’ bonuses may be seen as an example of this. Climate change has shown there is unfortunately no ‘world government’ – so we are lucky in the EU to be part of a democratic 27 nation federation that has the power to make its own laws. It is also, as it happens, the world’s leading economy.