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ECONOMY: EU Divided Over Regulation

BRUSSELS, Feb 13 2009 (IPS) - The global recession has exposed the ideological fissures at the highest level of officialdom in the European Union.

Joaquin Almunia, the European commissioner for economic affairs, expressed a widely held view Feb. 11 when he declared a “need for more ambitious regulation” of financial services, implying that the way this sector has largely been exempt from stringent rules has contributed to the near collapse of the international banking system.

But Almunia, a Spanish Socialist, does not hold the portfolio in the European Commission, the EU’s executive arm, which would enable him to come forward with the kind of proposals he deems necessary. Instead, responsibility for this area belongs to Charlie McCreevy, the single market commissioner, who has emphasised his antipathy to far-reaching regulation.

Since taking up his current post in 2004, McCreevy has repeatedly recited the mantra ‘less is more’. “For far too long the EU has been adopting rules at EU level, simply for the sake of having rules at that level,” he told a conference in Cape Town during 2007. “Once adopted the rules have been left to gather dust on the statute book. My approach is a different one. We should adopt fewer, better quality rules and then devote our energy to making sure they are properly enforced.”

Irishman McCreevy is studying a range of options for how hedge funds should be regulated, and has been tasked by the Commission with presenting a plan for doing so before elections to the European Parliament this coming summer. Yet while he has invited comments from all interested parties as part of a ‘public consultation’ exercise, he has maintained that he would prefer to see these investment funds subject to voluntary codes of conduct, rather than binding laws.

Some economic analysts have contended that hedge funds are at least partly culpable for creating the sub-prime crisis in the U.S. and for endangering banks on this side of the Atlantic by engaging in a highly speculative activity known as short-selling. Nonetheless, McCreevy said in late 2008 that hedge funds generally play a positive role in modern finance.

“I think he is finding it very hard to accept that his beloved unregulated market has failed,” said Poul Nyrup Rasmussen, the former Danish prime minister and now a Socialist member of the European Parliament. “He has certainly been trying to delay and where possible avoid regulation on hedge funds and private equity. I can’t say what lessons he has learned from the crisis but he does not seem to have changed his dislike of market regulation, which is a pity because practically everyone else has realised that better regulation is unavoidable and necessary. I suspect we will encounter further efforts by him to put off regulation.”

Although hedge funds were banned in Germany until 2004 because they were considered too risky, McCreevy encouraged their development in Ireland, where he was finance minister from 1997 to 2004. And by the time their global value was estimated at 2.5 trillion dollars in the summer of 2008, the International Financial Services Centre in Dublin stood alongside London and New York as one of the major onshore centres of hedge funds in the world.

“Mr McCreevy behaves like a lobbyist for the hedge fund industry,” says Peter Wahl from World Economy, Ecology and Development (WEED), a German anti- poverty group. “He has an extremist position and is a full believer in the casino style of capitalism that has now collapsed.”

In recent years, McCreevy has publicly identified with the chief architects of market fundamentalism. In December 2005, he praised Margaret Thatcher for how she had “economically transformed” Britain as its prime minister in the 1980s. And he quoted Milton Friedman, intellectual guru to the late U.S. president Ronald Reagan, as well as to the Chilean military dictator Augusto Pinochet, to support his contention that tax competition between nations is healthy.

In December last year, a United Nations conference in the Qatari capital Doha recognised the kind of tax competition McCreevy favours as a major contributor to global poverty. U.S. President Barack Obama has also promised to crack down on tax havens.

According to the World Bank, up to 800 billion dollars in untaxed capital leaves poor countries or economies in transition each year, frequently because multinational firms have received tax breaks from the host countries. This dwarfs the 100 billion dollars that such countries receive in annual development aid.

Accountancy firms have been accused of providing invaluable advice to companies about how they can conceal their profits and thereby evade tax. The four biggest firms with global reach – PricewaterhouseCoopers, KPMG, Ernst & Young and Deloitte – have all paid huge settlements in recent times after they were sued for breaching financial rules. Yet McCreevy, himself an accountant by training, has recommended that the four (joined together in the International Accounting Standards Board) should effectively set the rules that companies listed on the EU’s stock exchanges should follow. This has thwarted moves to introduce the kind of international system deemed vital by anti-poverty campaigners to tackle tax evasion: one where every multinational firm has to state what profits it makes and what taxes it pays in every country where it operates.

“Published accounts will always be like bikinis – much more interesting for what they conceal than for what they reveal,” McCreevy has said. “The view that more frequent reporting by companies increases transparency is one about which I am deeply sceptical.”

John Christensen from the Tax Justice Network differs: “The IASB is a private company. By and large, it is manned by and controlled by the big four accounting firms and their clients. It doesn’t generally consult outside the four. McCreevy is very closely connected to the four, he comes out of that background. And he doesn’t buy into the idea that there is a legitimate interest in corporate information outside the investor community.

“There is not necessarily any financial conflicts of interests. But I’m afraid McCreevy is seen as representing the interests of the International Financial Services Centre in Dublin. Dublin is competing with other tax havens like the Isle of Man and Jersey. It is pushing lax regulation and McCreevy is seen as part of that problem of lax regulation.”