The Die Is Cast: EU Warns 'The City'

EU Markets Chief Barnier Warns The City 'Casino Days Are Over'

The deceptively quiet Phoney War between Brussels and Anglo-Saxon finance is coming to an end. Life is about to change for hedge funds, commodity traders, and the 'prop desks' of global banks in the City of London.

By Ambrose Evans-Pritchard | 9 September 2010

Michel Barnier said the new European Single Market Authority will have sweeping powers to control derivatives. Photo: AFP/GETTY "We want to know who is doing what with short-selling," said Michel Barnier, the European single market commissioner and the Frenchman in charge of the EU's new machinery of regulation. "We need markets, and we need financial institutions that create value-added, but everyone has to be able to answer for what they are doing. People taking crazy risks linked to crazy rewards have to be brought back to their senses," he said, in a wide-ranging interview with The Daily Telegraph at the annual Ambrosetti conference on the shores of Lake Como.

Mr Barnier said the new European Single Market Authority (ESMA) endorsed in principle last week— along with EU banking and insurance watchdogs— will have sweeping powers to control derivatives. "The EU authorities are going to look at every product. ESMA can restrict leverage, or in exceptional circumstances even ban a product altogether," he said. The Commission is introducing a text on derivatives next week as part of a new oversight machinery covering the gamut of finance and investment, including controls on private equity, hedge funds, as well as oil and currency trading.

Mr Barnier said there was no plan for a 'blanket ban' on the short-selling of stocks or on the use of derivatives such as credit default swaps (CDS), famously exploited by funds to short Greek, Irish, Portuguese, Spanish bonds during Europe's debt crisis this year. "It is not a question of 'prohibiting'. Short-selling is useful, if used well, but we want to avoid abusive 'naked' short-selling, and be able to take action in emergencies," he said.

Naked short selling is where funds bet against assets they do not own without first borrowing the underlying security— sometimes in an attempt to destroy a company [[§oor other underlying asset, eg, a currency such as the British pound sterling§c: normxxx]]. The distinction is often blurred in real life. Investors use a range of derivative short instruments as a way to hedge other assets that are illiquid.

Mr Barnier laughs off talk of 'a Brussels plot' to shut down the City of London— the putative ambition of Louis XIV, Napoleon, and the French 'elites' for three centuries.

"The City is the foremost financial centre of Europe, and a pillar of our force, and I want it to continue to be so. As French citizen I voted for the UK to be admitted to Europe. But it is in City's own interest that it should be well regulated, by that I mean 'smart regulation'," he said, adding charitably that London was rather a victim of a US-made crisis than a major contributor to the global banking debacle.

"I have been very careful in our negotiations on financial supervision to reach a successful deal with the British. It is a priority that we work together, the British must be on board. We are well aware of George Osborne's red lines," he said, referring to a safeguard clause that any EU decision must not infringe on fiscal sovereignty. "I have found the new government pragmatic and competent, and Vince Cable is a sage."

The promise not to run roughshod over Britain's biggest industry is undoubtedly sincere. Although Mr Barnier is a former French foreign minister and farm minister, he is a lifelong believer in the European ideal. He comes from the mould of Robert Schuman, the French statesman who offered the historic olive branch to a defeated Germany in 1950.

Mr Barnier— a Savoyard— is viewed with suspicion by hardliners in Paris as a man too willing to please Perfide Albion. His right-hand man as director-general is Jonathan Faull, a British official with 'free-market' views. Yet the problem for Britain is that ultimate control over the City is passing from Westminster to Brussels in perpetuity, while commissioners come and go.

"This is irreversible," said David Heathcoat-Amory, Europe Minister in the last Tory government. "This is what the EU calls an 'occupied field': it never relinquishes territory once taken. Britain does have an emergency brake but it is a very flimsy safeguard because it can only be used in extremis, and in any appeal is justiciable before the European Court, which is not impartial."

He said the Tories had swallowed the bitter pill because they did not want a clash over Europe to damage the new government. "They couldn't risk a fight on too many fronts," he said. The three new watchdogs— each made up of one regulator from every EU state— have powers to make binding decisions, mostly by simple majority. This means that Malta and Latvia together have more voting power over the future of the City than the British government. London has no veto.

Mats Persson, head of Open Europe, said these bodies will inevitably acrue more powers as fresh EU laws are passed. While British regulators will still be in charge of "day-to-day" matters, this does not disguise the fact that national regulators are reduced to enforcers of EU decisions. It also creates the risk of fresh confusion over exactly who is in charge of what— replicating the weakness of Labour's tripartite system.

Mr Barnier's most fervent regulatory wrath is reserved for those who break the ancient taboo of speculating on food products. "I find that scandalous. I think we as Europeans ought to pay a lot more attention to what is happening in the rest of the world, above all Africa," he said. He said there was evidence that speculators had played a role in pushing up the cost of oil and food during the price spike in 2008, when hunger riots broke out in a string of poor food-importing countries across the world.

Fresh strains have emerged over recent weeks after Russia imposed an export ban on grains, setting off a worldwide scramble for supplies. Food riots killed ten people in Mozambique earlier this last week. Global wheat price have doubled since June.

France plans a new world 'governance' for food as part of its G20 presidency next year, as well as further scrutiny of energy and commodity derivatives. It will be pushing on an open door in Brussels. After twenty years in EU politics, Mr Barnier still believes in the uplifting power of the 'European Project' but he learned a hard lesson as a key drafter of the European Constitution, the stillborn treaty rejected by French and Dutch voters in a carthartic protest against EU elitism.

"Europe's leaders wasted its vital energy for a decade arguing about institutions. They responded to the angst of their peoples over globalisation by lifting the bonnet of the car and talking about the engine. That is not how you inspire citizens. Besides, China, India, and Brazil are not going to wait for us."