After a long debate at the two-day European Council in Brussels, heads of state and government gave their green light to a common document, and have seemingly overcome two major sticking points that were putting at risk crucial reform of the European financial supervisory architecture.
At stake were the European Commission's proposal on the role of the new EU authorities to oversee cross-border groups, and the powers of the European Central Bank within the new European Systemic Risk Board (ESRB), which will send warning signals whenever the entire financial system is at risk.
The UK led the criticism on both issues. However, pressure from other EU heavyweights, in particular Germany and France, and news arriving from Washington of Obama's ambitious plans on financial supervision pushed UK Prime Minister Gordon Brown to accept a compromise that takes into account British concerns.
As for micro-supervision of the EU's cross-border banks and insurance firms, the Commission proposed that three new EU authorities, comprising the new European system of financial supervisors, should have the final say in the event of disputes between national watchdogs.
The text agreed by EU leaders today asserts that "the European system of financial supervisors should have binding and proportionate decision-making powers [...] in case of disagreeement between the home and host state supervisors, including within colleges of supervisors".
Arguably, such a move would mean that if Italian and Polish authorities disagree regarding recapitalisation of an Italian bank operating in Poland, for example, it would be the EU supervisor that would settle the issue with binding decisions. This represents a significant concession of national powers.
However, the text does not set out any agreement on the controversial issue of burden sharing. "The European Council stresses that decisions taken by the European Supervisory Authorities should not impinge in any way on the fiscal responsibilities of member states," explains the document.
Should major financial institutions fail like in the current crisis, there will be no European competence to establish which countries will have to foot the bill and by what means. National interests are likely to prevail again on this issue.
As regards macro-supervision, the compromise foresees that "the members of the General Council of the European Central Bank will elect the chair of the European Systemic Risk Board". The Commission proposed that the president of the ECB could chair the new Board.
The text gives more power to the General Council, which is made up of the governors of central banks of all the EU members. It remains to be seen what kind of majority will be necessary to elect the president. A simple majority might give more power to the 16 eurozone members over the 11 non-eurozone countries within the General Council.
Gordon Brown also managed to convince his European partners that EU supervision should be confined to financial institutions and credit rating agencies, rather than also including clearing houses for derivatives. The City plays a key role in the EU markets for these financial products and wants to keep external meddling to a minimum (EurActiv 20/02/09).
The European Commission is now expected to propose detailed legislative measures this autumn, on the basis of the agreement reached today at the highest political level.
