November
8th, 2002 Issue - Op-ed Section
Translation by the author from original text in French
Is there such thing as a European capitalism? Capital markets are in a state of flux following the collapses of Enron, Andersen, WorldCom or Vivendi Universal. In the United States, this crisis has led to vigorous debate and tough decisions, some already made and others yet to come. Facing the same challenge, Europeans waver between a range of desultory postures: denial (our system is superior, nothing must change); defensive opposition (the extraterritorial Sarbanes-Oxley Act is unacceptable, let’s fight it in order to stay as we are); pointless incantation (market capitalism is evil, let’s abolish greed and build a bright future); and imitative parochialism (we feign to mimic what the U.S. does, separately in each of our countries). In France, with only a handful of exceptions, the first of these postures is the rule for corporate managers, the second for accounting professionals, the third for opposition politicians and the fourth for governing politicians. None of them is appropriate to the challenge we face, if Europe is ever to avoid a fate of in-built economic and financial inferiority.
Government-led regulation of security markets is the best known protection against their unwanted excesses. It ensures that all players, including minority shareholders, can play the market game by the same rules; if necessary, it punishes the cheaters. In the United States, the Securities and Exchanges Commission is the “stockmarket cop” since its creation following the 1929 collapse. Quite naturally, and in spite of the legitimacy crisis experienced by chairman Harvey Pitt, its role is pivotal in all the reforms which have been discussed or decided since the beginning of this year, such as the Sarbanes-Oxley Act and the new listing requirements at NYSE and Nasdaq. Regulation is not only a protection for investors and savers, it is also essential to the economy’s competitiveness: by strengthening the markets’ efficiency and the public’s trust, it has a downwards effect on costs of capital. In the U.S., the low cost of capital has played an essential role in the spectacular growth of the 1990s.
In Europe, each country has created its own market regulator: COB and CMF (soon to be merged) in France, Consob in Italy, FSA in the UK, offshoots of the Länder in Germany, and so forth. In total, about 40 different agencies deal with the task throughout the Union. But borders between markets themselves are quickly fading. Stock exchanges are set to regroup further, after Euronext already merged those of France, Belgium, Portugal and the Netherlands. Inherently borderless, so-called “alternative” electronic trading systems are on the rise. Essential infrastructures such as clearing and settlement progress towards unification. Institutional investors now think much more in terms of sectors than of countries: their choices are between Peugeot and Volkswagen, or between TotalFinaElf and Shell, rather than between Peugeot and TotalFinaElf in an ever less meaningful “French shares” section of the market. Of course, the adoption of the Euro only accelerates this trend.
In the almost unified European market, the fragmentation of stock market regulation plays against the interests of corporations large and small. They must confront an unnecessary multitude of diverging rules and bureaucracies. Sure, there is now a coordination process between national regulatory authorities, following a report to the European Council by Alexandre Lamfalussy, but it will take decades before a real convergence of practices takes place. Competition too often leads not to excellence and innovation, but to levelling down to the lower denominator when companies register their operations in countries with lax regulators, in order to avoid the tougher ones. The bottom line of these diverging national practices is a reduction of cross-border financial investments flows within the European Union, all things being equal, which in turn raises the cost of capital for European capital-hungry growth businesses.
Even more important is the need for common rules which only a strong, unified authority can set. For now, only the SEC, backed by a U.S. market roughly twice as large as all European markets put together, is strong enough to get a say in the global markets. The transatlantic imbalance is mirrored in agencies’ budgets: EUR 27m for France’s COB, to be compared with US$ 776m in 2003 for the SEC. In this context, European players cannot even dream of setting any kind of rule. One example is accounting standards, where the Europeans just relinquished their standard-setting capacity in favour of the IASB, a global body which they do not control. No European regulatory authority can match the SEC’s influence in the IASB’s consultative process, which would be the only way for Europe to regain some degree of influence in this essential issue.
Gathering Europe’s existing regulatory bodies under a single authority is now a necessity. It is also feasible: the shock experienced by the markets at last makes reform possible. It means a shared political commitment by European heads of state; a revision of Europe’s treaties is required. This process must be started without delay.
This is an ambitious reform, which must avoid three pitfalls. The first one is sinking into quicksand: there are a lot of technicalities in the issue, which make it necessary to set a binding timetable from the outset, as in the monetary union process or, more recently, in the U.S. Sarbanes-Oxley Act for the creation of the new Public Company Accounting Oversight Board. The second pitfall is lack of democratic accountability: the future European regulatory authority will have to be truly responsible vis-à-vis the European executive and legislative powers; an appeals mechanism will also be needed, which may imply changes in the European Court of Justice. The third pitfall is over-centralisation: companies and investors need a regulatory partner which speaks their language and knows their particular national habits and rules, especially in the areas of tax and corporate law where European harmonisation will not come soon. This means that most existing national bodies should be partly kept under the new common authority, and keep some autonomy for making single decisions.
Finally, the process must be unbiased. An earlier discussion on this topic, in 2000, has been presented by opponents as a “French conspiracy” whose aim would have been to impose a European regulatory behemoth based in Paris. The debate on market regulation deserves better than that. Its promoters must make it clear that they are defending a common European public interest, not narrow national aims. It is perfectly possible that in this context the United Kingdom will choose to stay away from the process, due to the City of London’s particular will for autonomy. The precedent of monetary union proves that none of these difficulties is insuperable. The two projects differ deeply, but the method and organisation scheme which have been successfully followed for the Euro can be useful guides for setting up a European stock market regulator, whose economic and political impact would be hardly inferior to that of EMU.
Europe’s rulers cannot continue to do as if nothing had happened this year in the financial markets. They must seize the opportunity for creating an efficient market regulation. If they choose not to do so, this opportunity will be lost, and Europe will have to wait another ten or twenty years before being able to define its own set of market rules.
Translation by the author