Euro Threatened as EU Regulation Scheme Stokes Political Tension

The Euro may see selling pressure ahead as traders seek to distance themselves from the political fallout of a plan to create a single European Union financial regulator. A proposal to put the ECB at the head of such a scheme could amplify existing displeasure with the bank’s performance, weighing further on the single currency.


[B]EU Finance Ministers Propose Region-Wide Regulatory Framework[/B]

A meeting of European Union finance ministers produced an outline for new, region-wide financial regulation aimed at preventing future crises along the lines of current turmoil. Policymakers proposed the creation of a European Systemic Risk Board (ESRB) to provide oversight of the financial system as whole as well as a European System of Financial Supervisors (ESFS) to enhance regulatory powers at the institutional level. A separate meeting to be held June 18-19 has also been announced to outline the specific functions to be granted to these new bodies.

[B]UK, Central Europe Oppose ECB as Head of EU Regulator[/B]

Political opposition to an EU-wide regulator’s infringement on certain member states’ sovereignty and the resulting haggling will, in a fashion emblematic of the regional bloc, likely produce a compromise plan. This all but assures that the new regulatory scheme will make the already convoluted maze of European economic regulations even more byzantine, creating an EU that is even more cumbersome in their response to future downturns than they are at present. Stratfor, a US-based forecaster, reports that the UK and a handful of Central European countries have already raised a number of key concerns. In the UK, the primary issue concerns proposals to install the European Central Bank to permanent chairmanship of the ESRB, a prospect that instantly conjures up fears that regulators from the Continent will so thoroughly mummify the country’s substantial finance industry in red tape as to drive them to close up shop and move elsewhere. Meanwhile, Central Europe is grumbling because the proposal could create a potential conflict of interest since Western European EZ countries both elect the ECB and are heavily invested in Central Europe’s banking sector. Both opposition camps are also worried about the prospect of a supranational regulator committing their taxpayers to footing the bill on some sort of EU-wide financial rescue effort as well as the implications of being dictated to by a central bank that they are not a part of. The UK Treasury’s financial services secretary Paul Myners aptly summarized the sentiment, saying “the President of the ECB is chosen only by those countries within the Euro Zone, raising the question of whether he or she can effectively or credibly represent the whole of the EU.” The response to these concerns this far has been the inclusion of a vague clause saying that the proposed setup will not “impinge in any way on member states’ fiscal responsibilities.” What this means in practice remains unclear, but more such amendments are sure to follow as the details are ironed out.

[B]Regulation Proposal to Amplify Concerns About ECB Performance[/B]

The introduction of a scheme to set up the ECB as the head of an integrated, EU-wide regulator may amplify existing concerns about the bank’s approach to dealing with the current downturn. Jean-Claude Trichet and company have been notably more reserved than most of their major counterparts in offering monetary stimulus, keeping rates at a (relatively) high 1% and limiting quantitative easing to a bond-buying program worth a meager 60 million euros. The implications of such waffling point to the prospect of political instability ahead if grumbling electorates begin to entertain increasingly frequent calls to free national monetary capabilities from the ECB’s “measured approach” as the recession deepens and unemployment levels rise, threatening the very existence of the currency union itself. The likelihood of such a scenario seems very reasonable considering the outcome of the EU parliamentary elections earlier this week, signaling an increasingly cold attitude toward the supranational body with a record-low turnout as well as revealing a preference for the euro-skeptic side of the spectrum with surprisingly strong performance by far-right politicians. On balance, this suggests that currency traders have scope to punish the Euro as markets price in both a longer path to recovery and the prospect of political instability in the near- to medium term.