The responsibility of market players. In this monetary crisis, EU politicians have decided to opt for clarity and taking a hard line. First the EU's Economic and Finance Committee (see newsletter 9501) and then EU finance ministers, the relevant EU commissioners and the president of the European Central Bank (see the report by Mathieu Bion of the Economy and Finance Council meeting in yesterday's newsletter) immediately slammed the shortcomings and errors of players on the financial markets, whether they be private banks, credit rating agencies or speculative fund managers. I made my views clear in this column in issues 9494 and 9495 - the titles provide a brief explanation: 'Monetary ructions last month could help clarify relationship between real economy and 'creative finance'' and 'Crisis or salutary clean-up of financial markets?'
The Economic and Finance Committee (EFC) used a register not usually found in documents of this nature when it slammed 1) the lack of transparency by the players at the end of the line of responsibility for bearing the burden of risky credit (the place where the risks end up is usually unknown and can even be wholly unexpected); 2) the role of complex derivatives; and 3) conflicts of interest within credit rating agencies (which prepare derivatives and then decide on their level of security). The EFC echoed the call for prudential control of hedge funds and for the risk assessment for complex futures and other financial products to be stepped up, also criticising the risk of a domino effect on economic activity. This was a true charge sheet drawn up against players on the money markets.
Measures have been announced. The politicians are understandably taking a more cautious line because they have to avert panic on the markets and reassure both investors and savers. But in Porto, the president of the Council, the European commissioners who were present, several ministers, the ECB president and the governors of member states' central banks were clear enough. They did, of course, express confidence in the functioning of the EU regulatory framework and the European economy's capacity to weather the storm and continue to grow, but at the same time they asked the EFC to indicate appropriate ways of boosting both the transparency of financial instruments and the rules covering the work of credit ratings agencies. They want this in next to no time - starting next month and ahead of the 'conclusions' document to be drawn up by the European Council in spring 2008. It is true that, as Commissioner Charlie McCreevy explained, there was no consensus about creating an EU surveillance and control authority, an idea that McCreevy himself opposes, but German Finance Minister Peer Steinbruck admitted he would have preferred the European Commission to make a stronger call for reforms...
Nobody will hazard a guess as to the actual extent of losses due to the turbulence on the money markets but we are already starting to hear people saying that banks and other financial institutions should deal with the issue themselves because they are capable of absorbing it with the huge reserves they have built up in recent years.
Two opposing views. Opposing views come basically from two sources: a) some British authorities feel that a radical increase in regulation is inappropriate, and this is understandable due to the sheer volume of financial deals in the UK economy; b) from a different starting point, French political circles continue to criticise the European Central Bank's interest rate policy, which they see as responsible for the inflated value of the euro. French President Nicolas Sarkozy keeps making this point and it seems to have the backing of a significant segment of the European Parliament.
Monetary policy for the dollar. I fear that the idea of the dollar gaining in strength is a utopian pipe dream right now. The United States has to cut its deficit, which is responsible for the startling rise in dollar reserves building up in China and elsewhere, shifting around like an errant bomb and threatening to wreak havoc any time, anywhere, in the international monetary system. Correcting this will require the re-valuation of other currencies, while the euro's value against the dollar is all in the mind, out of kilter with the US trade balance. But this is a more general question that the Council will return to one day if it decides to implement its responsibilities for the euro exchange rate (as foreseen in the Treaty). The priority for the moment is to correct the financial markets through increased transparency over how they operate and increased control over the behaviour of market players. There seems to be a determination to move in this direction and this needs to crystallise, to the benefit of the real economy. (F. R.)