Charlie McCreevy Event
FREDERICK KEMPE: Welcome to you all and thank you for joining us for our third event in the Mapping the Economic and Financial Future series. I’m Fred Kempe, president and CEO of the Atlantic Council and our speaker tonight is Charlie McCreevy, the European Commissioner for the Internal Market and Services.
With the generous support of Deutsche Bank, this series has brought together some of the best minds from business and policy-making communities to provide insights and an opportunity for deep discussion on not only critical issues, but timely issues that are at the top of the trans-Atlantic agenda for the moment. We hope that the combined contribution of these speakers will help shape the intellectual foundation for us to find our way through this crisis to a better place.
Our first two speakers have already done much to help us better understand the current situation and suggest steps for moving forward through their frank remarks and insightful analysis. Mr. McCreevy, your fellow commissioner, Neelie Kroes, kicked off the series by unequivocally stating: “Until we fix the banks, no amount of government spending can fix the real economy.”
Dr. Josef Ackermann, the CEO of Deutsche Bank, in his talk here exactly a month ago stated: “In no small part, the current crisis was caused by discrepancies between the nation-based supervision and national rules on the one hand, and global markets and global players on the other. Hence, we need to align our rules and our institutions with the reality of a global economy.” The text of both of those speeches and if you want to watch the whole thing – you can see that as well on our Web site: acus.org.
And, of course, with Dr. Ackermann talking about alignment, it’s great to have the Europeans’ chief aligner with us tonight. The global economy remains fragile, even if some economists and policy-makers look to a few hopeful signs that we’re through the worst. One of the essential components for a sustained recovery will of course be the regulatory framework we put in place to govern international financial transactions. It is our view at the Atlantic Council that successful international cooperation in this effort will require that countries identify and reconcile their often quite different views about some quite fundamental issues – first of all the nature of the crisis, second of all its causes, third of all the role of the state in addressing the crisis.
Most importantly, countries will have to perform a delicate balancing act between meeting the political demands of their domestic constituencies while at the same time crafting sensible international policy – in other words, the Atlantic Council does not want us to panic.
Let me thank first of all the global business and economic issues program of the Atlantic Council, which curates this speaker series and the director, Alexei Monsarrat, and his deputy, James O’Connor.
Introducing the commissioner is going to be our board director and good friend, Frank Kelly. In military channels, one tends to speak about the value of a soldier-statesman. In the world where economics and finance define and shape our lives, we at the Atlantic Council talk about the businessman-statesman and Frank is one of those. He’s had a distinguished career in public and private sectors and represents the kind of leader we enjoy having on the board of the Atlantic Council.
He’s a Deutsche Bank managing director and head of government affairs, Americas. In that job, he oversees legislative and regulatory matters for the bank in the region. He’s been responsible for maintaining the bank’s relationships with the White House, Congress and federal agencies and state relations. He’s held senior positions at Charles Schwab and Merrill Lynch and has served in government at the SEC, Department of Justice and at the White House in the Reagan and George H.W. Bush administrations. There’s a lot of movement back and forth between the private sector and government, as you know, Commissioner McCreevy. So please join me in welcoming Frank Kelly.
FRANCIS J. KELLY: Thank you very much, Fred. My mother will be sending you a check tomorrow for that kind introduction. As a member of the board of directors of the Atlantic Council, it is a very distinct pleasure and great honor to introduce our distinguished guest this evening, the European commissioner for internal markets and services, Charles McCreevy.
We are all painfully aware of the global economic and financial market turmoil that has been underway for the last few years. A number of financial institutions around the world and markets we have trusted have let us down – failed us, to be more precise. This has had an impact on global markets but also very clearly on families and individuals as unemployment has soared in countries around the world.
The crisis has hit developed countries hard and developing countries even harder. As a result, many questions have arisen about the future of the financial services industry: what purpose it should serve and how it should be regulated. And along with this most basic of questions has also risen the question of how, in this globalized world, do you coordinate regulation between countries and regions, and how do we win back the confidence of the public in these institutions which have generated both enormous prosperity and enormous risk.
Fortunately, there are number of true leaders on both sides of the Atlantic dedicated to answering these questions and ensuring to the best of their ability that we will never go through the financial markets meltdown that we continue to experience today. One of these leaders is Charlie McCreevy. Born in County Kildare, Ireland, he was first selected to the Irish parliament in 1977. He was quickly seen as a rising star in the Irish political establishment and went on to hold three key positions in the Irish government: Minister for Social Welfare, Minister for Tourism and Trade, and finally Minister of Finance. This last post he held from 1997 to 2004, years that we remember as years of tremendous growth in Ireland and where Ireland really was seen globally as a new financial hub.
Currently, Mr. McCreevy serves as the EU Commissioner for Internal Market and Services, an enormous job by any measure. Just for a moment if you bear with me, if you think of the short list – and it will be just a short list here – I can give you a sense of the tasks he has before him and at hand: basic bank reform, reform of regulation and reform and/or regulation of the hedge fund industry, reform of the derivatives industry, oversight and regulation of credit rating agencies and, for the first time, he and leaders here in the United States are attempting to achieve this in a coordinated trans-Atlantic fashion, an extraordinary challenge in normal times but as we all know, these are not normal times.
We’re all quite eager to hear your thoughts on these issues, Commissioner. Thank you for joining us today. We’re all honored by your presence. Ladies and gentlemen, Commissioner Charlie McCreevy.
CHARLES MCCREEVY: Thank you very, very much for that kind invitation (sic). It’s been six months since my last official visit to the United States and while I’m delighted to be here with you today, I can hardly tell you that much has changed. On this occasion, I’ll be meeting with Treasury Secretary Geithner, Fed Chairman Bernanke, SEC Chair Schapiro, CFTC Chairman Ginsler, FDIC Chair Bair, also senior figures in Congress and others in the next couple of days and I’ll have two simple questions for them: How can we work together more to ensure a seamless world of financial regulation? How can we work together to make our investors and markets safer? I know what I will have to say: None of this is easy. None of it can be done in isolation. It requires strong international cooperation and demands very strong political leadership.
I have to have my own views on the origins of the crisis on other occasions and in summary, there was an unholy nest of factors. I can spend time telling you what these are but I won’t. There are some of you who would like to delude themselves this was a purely American virus. Let me say this here and let me say it clearly: There were businesses and regulatory failures on both sides of the Atlantic. Consequences for our workers, our citizens and our investors are huge on both sides. On both sides of the Atlantic, hardworking men and women are losing their jobs, homeowners are struggling with monthly payments and in many cases being evicted. Many people have seen the value of their savings plunge and may need to work longer before taking their well-deserved retirement.
The pain and uncertainty is felt just as much in Dublin, Ireland, as in Dublin, Maryland. The confidence of markets has been extremely badly damaged. What is more, public confidence in markets and providers has been severely damaged. But, in the longer term, markets are not driven by sentiment; they are driven by fundamentals. And our fundamental objective in financial regulation must be to repair this damage, restore confidence and get the system running smoothly again. But this means recognizing that many of the assumptions that we made were either wrong or can no longer be relied upon.
We can no longer rely on wholesale financial markets to look after our own long-term interests. We can no longer rely on empty assertions that if nothing has gone wrong so far in a particular sector as evidence that nothing will. Sub-prime has taught us that. We can no longer rely on outmoded notions of national regulation and supervision.
We made rapid assessments of member states’ bank rescue schemes. And I see that my colleague Neelie Kroes, who is Commissioner of Competition, spoke to you recently here about it. And where regulation was needed urgently, we have acted. We moved to adopt a directive on deposit guarantee schemes in record time to restore consumer confidence. We secured legislative agreement on new solvency standards for our insurance companies. We amended our capital requirements directive, taken forward the emerging lessons of the crisis, especially on securitization and liquidity management.
We acted quickly and strongly on credit rating agencies, an issue which I have been long concerned. We are taking clear action on credit derivatives because of the systemic danger that these could pose to the market. It was essential that contracts affecting European markets were resolved under European regulation. Our investors in Europe needed nothing less.
We’ve issued two recommendations to our member states on remuneration policies for directors in all listed companies and another for financial services firms. Our latest response – we agreed remuneration policies of credit institutions and investment firms within the scope of prudential oversight. We have on the table a proposal on hedge funds. We suggest regulating the alternative investment fund managers to deal with the risks of the system that they could potentially represent.
Just last week, we set our ideas on upgrading our regulatory and supervisory system in Europe to address that the failings identified by de Larosiere report. We followed this up with a proposal, set up a European systemic risk council and a European system of financial supervisors. I’ve also announced work on addressing gaps in our fund management rules – these were the weaknesses shown off by the Madoff affair.
Now, I know that there are some in the United States who question all of this action, who suggest that I was front-running the G-20 or even breaching it, who argued that there was insufficient consultation with you, our main trading partner. We are increasingly accused of protectionism and told that some of the recent measures are more like rules of engagement than terms of engagement. Well, how well we survive from now on depends only in part on our trading partners but that part of the equation is crucial to us and that is why I’m here this week.
What this crisis has exposed is that we have a fully global economy and that we have to cooperate regionally, globally and bilaterally. We have no option; we have to rely on others. I want us to engage on this and set the terms of engagement for future cooperation.
But, as politicians, we always need to see to our own constituents first and that goes without saying. But this brings me to another point: There is no government anywhere that can do the necessary reforms without becoming politically unpopular and I say that as an Irish politician long in the tooth and very long in the job.
The political mood is restless. We’re in a different stage to our political cycle to you here in the States. You have a new administration but we are coming to the end of a political cycle in the European Union so we have to act in the EU. Given that we’re coming to the end of a political cycle with European parliament elections later this week and a new European commission later this year, if we had to leave, we would have lost a year. And that would not have been acceptable to the people of Europe.
Just as we had to act, you have to act. It’s no secret that we have not liked every act or rescue package that has come out of Washington this year. For instance, we do not agree with the Buy American provisions inserted into the economic stimulus. This is damaging for international trade and ultimately we believe it would be damaging to the U.S. economy. U.S. firms and U.S. workers suffer from this, but we respect your right to act and the urgency of your action.
Moving forward, we all have to do better. We have to ensure that we have much more effective macro-protection surveillance and intervention mechanisms. I welcome the work of the G-20 in strengthening the IMF and the work of the new Financial Stability Board. At micro-protection level as well, we have to put in place much stronger cooperation. The mission proposals for reforming prudential oversight as I have just mentioned will help to do this in Europe. The agreements that we reached at the London summit two months ago will help us do this at a wider level.
But none of this will be enough. There has to be far greater cooperation and mutual reliance of financial regulation between advanced economies and particularly between the European Union and the United States. It is not a luxury; it is the only way of preventing a future crisis.
Over the last few years, the European Union and the United States have begun to develop such cooperation in what we know as the Financial Markets Regulatory Dialogue. We made significant progress, removing accounting standard reconciliatory requirements, making it easier for companies to de-list and de-register. We resolved tensions from Sarbanes-Oxley and EU’s Financial Conglomerates Directive.
But the crisis and how we respond to it reveal that we need to do far more. We need to take cooperation to a new level. We need to build a new financial regulatory system together. We need to work urgently on a cross-border crisis management. We need to reflect on the kind of financial market that we want, what we do about systemic institutions that are too big to fail.
So my fundamental message to you this afternoon is that we in Europe have not abandoned the course that we set out over the last 10 years. We remain committed to open investing, we remain committed to a balanced regulatory approach and we remain committed to trans-Atlantic cooperation. If we are to reenergize our markets, restore investor confidence and steer our economies back to levels of employment and prosperity that our citizens so urgently require then we must recognize that the rules of the game have changed and that a new form of cooperation is required. It’s a difficult adjustment but it is one that we have to make. My visit this week is just one step along that particular road. Thank you very much.
MR. KEMPE: Commissioner McCreevy, that was a very important statement and, also, you put a lot into a short period of time so we have lots of time for questions. I want to pick up on your discussion of some differences that there have been in taking on this crisis between Europe and the U.S. You spoke of some who were accusing you of front-running. You also spoke of feelings of and worries about the Buy America provisions in some U.S. approaches to the crisis.
As you enter town now and you take a look at the differences we’ve had on fiscal stimulus, reach of regulation, other fundamental issues, where are we now? Where are we now between the U.S. and Europe on these issues and where do you see the biggest differences that need to be bridged? Where do you see differences that could come up in the time ahead? What is it you need to deal with in terms of differences at this point?
MR. MCCREEVY: Well, I think the first thing all of us bear in mind when America is dealing with the European Union is that it’s not like dealing with government to government in normal terms. If United States is dealing with United Kingdom government in a specific way or the German government or the Irish government. The European Union is a very peculiar construct and we have to arrive at consensus-building ourselves and not every member – it’s not a U.S. government as we know it as such. So therefore there are often differences of emphasis between different member states as to how we should be progressing so we have to build consensus ourselves.
So, therefore, in many of the proposals that we bring forward and get agreement upon, it is consensus arriving at which these things are washed down or whatever and it might be what we often started out with or what we’d like to do and that should always be borne in mind.
And, secondly, it is – even though things take a while to go through Congress here, they take usually a damn site longer to go through the European business because of this very peculiar construct that we have. So we can’t react as quickly usually as you do in the United States or say the German government or the French government can do it like that. You can’t do it quickly even though we have done some things in the recent past; I pointed out that we did get done very quickly but there was an immediacy about it and everybody agreed.
Someone always has to jump first. Some of the things that we have done, like say for example with credit rating agencies, with our proposal on the terms of investment funds, what we have done in many areas, our ideas about derivatives, some people that they – why didn’t you wait for somebody else? But someone has to go and do something about it in the first occasion and we have it on the table. So it’s not always to expect perfection is the type of thing, but the one thing that has to be borne in mind when dealing for us with the United States is that the different member states of the European Union have vastly different approaches and it does not depend at all on the type of government in the certain member state.
There will be, let’s say, a protectionist tendency in some member states that would have conservative or deemed to have conservative governments and it’s there whether there are socialist governments in the European government or more right, center-right governments. It’s a European thing whereas there’s more liberal economics in some other member states.
Therefore when we look at the United States, I’d say the United States puts in the Buy America provision, and even though it was tempered down and I know the caveats are in, I can have no problem with that. But that is used by others in Europe then to say, well, if the United States is doing that, why can’t we do the same? And then you build up barriers there.
So everything is looked upon very intensely across the water so you’ve just got to be conscious what Europe is doing and we should be conscious of what you are doing. But don’t expect perfection at all times.
MR. KEMPE: Well, I think you raise an interesting question because for the U.S. to take a course of a Buy America provision is problematic but it doesn’t really change the nature of America. For members of the European Union to take those same provisions, it starts endangering the single market and it starts endangering the cohesiveness of the European Union.
Now, Wolfgang Munchau wrote in the Financial Times about this and gave some pretty interesting examples, Opal and others where there seems to be – when in trouble, turn back to the nation-state. So are you – in general, the impact of the financial crisis on the European Union project and the single market – are you concerned? Are you seeing things that worry you?
MR. MCCREEVY: Well, before even the downturn came – the crisis came – there were increasingly worrying tendencies because there was economic slowdown and when there’s economic slowdown, it is always the case, whether one is a member of the local town council, whether it’s a member of a bigger region or when as a member of parliament, as I was in Ireland.
When you’re facing your constituents that are losing their jobs in a business, factory, service industry or whatever – and when they’re all standing in front of you saying, what are you going to do about us, and, Mr. Politician, sir, these jobs are being relocated over to some other state, some other county, some other part of the region. And you’re standing there; you’re depending on your votes. It’s the same road whether it’s the United States, France, Ireland or the Czech Republic. You’ll be inclined to say, why don’t you do something about it?
And, therefore, rather than looking at the broader picture and saying, open markets are great and everything else, you’re inclined to – governments are, politicians are – inclined to close in. And with economic decline, that’s the natural reaction to what’s happened. There’s that tendency in any event in Europe. It’s some of the older member states rather than newer member states on the rising unemployment.
Then you add to it the financial crisis, which is deepening into the wider economy, unemployment rates are going up; it is the natural reflex action of governments to make changes to respond to the needs of their citizens. When they go to big events, like summit meetings, they all say, oh yes, we’re all for this, but when they have to face their electorate back home, there’s backlash and response. And that is a danger.
Now, what I have to say is that despite the terrible economic consequences of what’s occurred over the last 18 months or so, we haven’t seen it to an extraordinary degree. But as Mrs. Kroes said when she was here – and my job is the guardian of the single market – we are constantly evaluating laws of member states, which, for these things, we take action against them. But, as your journalist friend has written, there is that tendency.
And I’m afraid, we have to – our job at the Commission is to be the guardian of the treaty and to enforce the rules. The difficulty is, we are dictated by laws, we can’t take like that, we have to go through a very long process; you can eventually go to court, but, as you know, from your experience, that can take a considerable length of time and the problem has moved on.
MR. KEMPE: Well, let me ask you to follow up on that, and then I’m going to also turn to the audience. If you’re balancing this, then, the impact of the financial crisis – and I know this goes beyond your portfolio – on the European Union: positive and negative thus far, danger to a single market – that’s negative. Where are you seeing, also, positive? People outside are looking in and saying, oh my gosh. People inside are saying, my gosh, I’m glad I’m inside your zone or whatever it is, what kind of problems would there be otherwise? What’s the balance at this point in the crisis?
MR. MCCREEVY: Well, I’m a little bit pleased as to the way it has worked out. If you were to say to me a year ago, things are going to get as bad as they were going to get, and by the end of 12 months we would have not had diminished the single markets, I would have said, well, I hope you’re right, but wouldn’t be sure about it. Whereas, there is not – we haven’t lost any particular – but you referred to a specific incident, which is very topical in this week, but there haven’t been – member states have not responded as drastically, or as potential as I personally would have feared.
Maybe I just was a pessimist in that area because I think that the economic decline has been so earth-shattering, and I think people, leaders, were so taken aback by that that they didn’t take – they said, god, we’d better all still kind of stick together and take a broad view – but it hasn’t been anything like what I personally would have feared; this is a purely personal view now.
MR. KEMPE: I certainly have much more that I would like to ask, but I think I’m going to turn to the audience at this point and throw in my questions, my additional questions, in between. And as you raise your question, please identify yourself, as well. Please, if you could just wait for a microphone, sir.
Q: Ted Symth from McGraw-Hill Companies. Commissioner, congratulations on your record over the years being consistently trader and free-marketeer. And you’ve managed to set an example in that for many years as a politician over that time. My question to you is, as we try to have cooperation in global places, what organization – what forum – do you think best represents an opportunity there- is it the Financial Stability Forum, is it something yet to be developed? Where would you push for, given what you’ve said: that it’s important to get some sort of global organization underway in the markets?
MR. KEMPE: And, specifically, Commissioner McCreevy, you did say at the end of your speech that you were coming here to talk about new forms of cooperation, so, to Ted’s question, is there anything specific?
MR. MCCREEVY: Well, I’m glad to hear this coming to Washington, then – at least the United States – someone compliments it being a free market here because one must read the European press, the European Parliament – I am recently – the last couple of years – regarded as the devil incarnate – because free-marketeer is not a popular phrase anymore.
And I’m regarded as the last outpost of this awful thing. (Laughter.) By the way, I hear people talk about this terrible thing, you know, free market capitalism caused all this. Like, whatever cause, I don’t know a form a capitalism which is not free market, but that’s – but I hear this phrase both in Europe and America, I’m sure, is as well. I’ll just pause, I have to take your question.
I think that, I’d say before we – I’ve been pragmatic in business life and in my political life, I’ve made my reputation. I think we have to make sure in Europe that we align the business ourselves, and align what we’re doing among the member states, and have a coherent response there before we start going out with preaching to other parts of the world, “It’s what we should do; it’s what the rest of the world should do.”
Apart from that, even in Europe, we don’t have a central government, and really what some people have been talking about over the last year, are having to say, a worldwide mechanism, if a larger think tank intellectualized that, they’re really speaking about having a world government. And that’s never going to – well, never say never in politics – but it won’t happen in the lifetime of anyone here in this room and there are some very young people here. I don’t see that happening. It’s not happening in Europe either because the European Commission is not a government. Some people around Europe, or around Brussels, think that it is, but I can tell you it’s not. And I don’t see any tendency to go that way.
So therefore I think you have to build on what is around. And Gordon Brown, in March ’08, suggested more or less, an enhanced role for the International Monetary Fund throughout the World Bank. The International Monetary Fund, why did he do that? I didn’t discuss it with him, but I assume the reason was, that is the one international organization there, and it was largely to grab something there, but he wasn’t preaching that it becomes a kind of dominant force, either.
What the government does, it enforces its diktat. The United States government says, passes a law – this is the way it’s going to be done. This is the way it’s going to be done in the United States. But, in Europe, in most economic matches, we don’t deduct power, either, because the response really rests with member states. So suppose there was a world body who had agreed all those things, either the IMF are now the financial stability board and we’re going to replace the National Stability Forum – the same organization but it’ll be a board – but how are they going to enforce the rules if they’re not the government?
Now, we’re trying to think up in Europe – and the man at my immediate left has worked a lot at this – the announced proposal last week about a European systemic risk council, and that’s going to be under the umbrella, more or less, or added on to the responsibility of the European Central Bank. But we’re still grappling with to whom they are going to report. But it’s still – they will not be able to enforce their opinion, probably by peer pressure, and it will be done and governments will have to account, and it will work like that. But they will not be the enforcement.
What the G-20 came up with was it is given an enhanced role to now, the new Financial Stability Board, as it’s going to be called. But the question, Mr. Smyth, is how all of these things are going to enforce – you can’t enforce it because the taxpayers of the United States elect the government of the United States, taxpayers in France elect the government in France, and so forth and so on around the world. So, therefore it’s –
MR. KEMPE: So, what’s the new form of trans-Atlantic cooperation?
MR. MCCREEVY: Well, trans-Atlantic cooperation has gone very well because in our own area – I mentioned both the Financial Markets Regulatory Dialogue, which is before – I didn’t create this before my time – it’s worked very well. In our time at this commission, Chancellor Merkel suggested the idea of a trans-Atlantic economic council, which has been operating now for – this is its second year – just to have a broader umbrella of things.
But we are developing cooperation in those mechanisms through the TEC, as I say, actually the Financial Markets Regulatory Dialogue.
But, I’d say, things are going to – I think we all recognize that we have to have international cooperation. But setting up a forum in which to do that, and how to enforce things, would prove somewhat more difficult.
MR. KEMPE: And then just very quickly on this European Systemic Risk Council that you’ve just mentioned, it seems an odd structure. On the one hand, it can overrule national banking authorities – if I read this correctly – but on the other hand, it doesn’t have any legally binding powers. So, I guess, without the teeth, when does it make its intervention?
MR. MCCREEVY: Well, this is another issue. There are 27 member states in the European Union, but only 16 of them have the euro as a currency. If you’re a member of the euro, which Ireland is, you submerge your rights to interest rate policy reevaluations, but your economic policy is still your own responsibility – you do your part of a common currency. Now, there are articles in treaties given rules about the euro zone. But, say, the United Kingdom is not a member of the euro zone, and they’re a very, very large economy.
What we’re going to do with the European Systemic Risk Council is that, it’ll be made up of the 20, under the auspices of the European Central Bank. It will not be a legal entity as such, but will be made up of the governors of the Central Banks of all the 27, and the regulators – because not every country has the same type of regulating structure – like you don’t have in the United States, either – it’s of all the Federal Reserve and FDIC, and CFDC, all these particular bodies – and all those will be brought in.
But it’ll still be the responsibility of member states for their own policies, but to peer pressure and make recommendations, all the information will be there. Unless, we were to – why did we go down this particular route? Because we went down to a route that you’re suggesting, which is a logical – intellectually you’re correct.
It would necessitate a change in the treaties; to set up a new body to do this, to give it powers to implement this thing. And to get that through the system – necessitating referendum and everything else – you’re talking, maybe, a decade or more, if at all. And before we even get to treaty change, before we get the other part. And so we deemed it, it was Mr. de Larosiere, who made the recommendations, deemed it more appropriate to try to grab onto what we have, rather invent something new, which would take an era.
MR. KEMPE: And the U.S. response to this thus far?
MR. MCCREEVY: Well, the U.S. – Mr. Geithner, if I understand it, in his address in March referred to the idea of the United States of a new type of systemic risk evaluation body, but no meat has been put on the bones yet as to how this is going to be worked here. But, as I understand it, the United States has been – and Mr. Geithner advocated – that there would be some type of – the United States would have some type of body to do this as well. But I understand there are differences of opinion between different regulatory structures here. But that is common enough in all jurisdictions.
MR. KEMPE: Thank you. A question – please?
Q: Hi, I’m Katherine Hauser from the Trans-Atlantic Business Dialogue. Thank you, Commissioner, for coming to Washington in this beautiful time of year, but also for talking so boldly about the need for trans-Atlantic cooperation. At the political level, we need to hear this message. The market needs to hear this message. And I think what you’re doing is great.
Let me press you on a question. You’ve been talking about cooperation government-to-government level. But you haven’t yet mentioned the word “private sector.” So my concern is, how can we adapt the Financial Markets Regulatory Dialogue that, in our view, you correctly ascribed to having achieved some important successes.
But there’s no private sector involvement whatsoever in that group. There’s no transparency, so what role can the private sector play? Certainly, I think, while we all love to hate bankers, we have to get beyond this and find a way for the private sectors to work with governments as we fashion the new regulatory structure. I’d be very interested in your thoughts as to how we would do that.
MR. MCCREEVY: In the Financial Markets Regulatory Dialogue we set up some years ago, you are correct that we don’t have anyone present from the private sector because we deemed it more appropriate to work on, say, the Commission’s services and the commissioners with our counterparts here and, to be fair, without a lot of involvement from government. We didn’t bring governments into it either – the member state governments in Europe.
It’s worked particularly well because it was informal, even though a lot of things we agreed upon had very far-reaching consequences. And that kind of structure worked well. And if I may be so bold to say, it also suited the people in the regulatory agencies here, as well, because the regulatory agencies – rightly so, mind you – guard their independence zealously. And it suits them not to be tied into, say, any type of more formal structure. So I think it worked very well.
But when we set up the Trans-Atlantic Economic Council years ago, we do have business input in that – on both sides. There’ve only been three meetings. It started in 2007, we did two in ’08, we had two in ’08 – in ’07 and two in ’08 and we’ll have some this year, as well. And on both sides there was input from, say, the private sector, there – on the EU side.
And they’d actually come to the meetings and addressed the meetings formally as well, and they worked both sides, and the same here in the States. So we did, in that structure – we wouldn’t like – since the Financial Markets Regulatory Dialogue – if I may humbly say, has worked so well, I’ve been very low to recommend that we go outside that, what we have so far, but the Trans-Atlantic Economic Council, we have taken that on board and we’ll see how that develops.
MR. KEMPE: Questions? We’ve got one here. Please.
Q: Doug Rediker, The New America Foundation: Commissioner, in the U.S., right or wrong, the stress tests that were undertaken provided the markets with a certain sense of finality to the risk that the system itself was going to collapse. And that’s done a lot to restore our confidence. Without getting into whether we think the metrics applied were the right metrics, what is Europe’s plan, if any, to undertake a similar exercise? And do you see the U.S. model as something that is worthy of replication?
MR. MCCREEVY: Well, this is quite a vexing question among the experts in Europe, notwithstanding the fact that we don’t have, say, separate agencies to operate these things, we have – the banking regulators operate together underneath an organization known as CEBS – C-E-B-S – Committee of European Banking Supervisors. And in the last four weeks, the CEBS has decided to do stress testing of European institutions, but it is not “on all fours,” as I’d say in Ireland, with what the U.S. did.
As I understand, what the U.S. did, they picked out the big institutions; the stress tests lead to individual institutions; they applied certain criteria as to what would happen in certain situations; and then they published their results for each individual institution, saying this was the situation. What CEBS is going to do in Europe – and this somewhat controversial – it’s going to aggregate the information of the major banks in Europe into a total – put it all together. They’re not going to publish the results. They’re not going to say, individual bank A, B, C or D; they’ve got a different methodology.
Now, this has raised some debate as to whether – some people are saying we should go down the U.S. route, and others saying we won’t. The reasons we aren’t going down the U.S. route are many for Europe, because, you must remember, CEBS is not a legal organization like, say, the Federal Reserve of the United States or whatever, and we’re not a central government. So suppose if they’d say, we investigated Bank A in member state 26, and it says, well this is the problem with this particular bank and this is what you have to do, it’ll be the member state in which that institute is that would have to deal with that particular institute. And there are all types of legal ramifications, there. Now, that’s one side of the argument – not doing it. The other side of the argument, some people would argue that we should be doing the States’ way.
I’d say it’s kind of more that it’s a work-in-progress at the present time. I’m not too sure – this is, I suppose, an open meeting and I believe if I say on or off the record, it always gets out in any event – my own simple view is that CEBS are not going to publish the results. Well, we are not going to publish the results, but yet, you announce that you are going to do it. If you are not going to publish results, you should never announce that you’re going to do anything about it. Because the next question will be, what did you find? (Laughter.) Like, I learned that’s the way it would go on in Ireland.
I can understand the arguments of what the European institutions are saying. One particular finance minister from a very important member state of the European Union has said, what good will – what effect is it going to have, in any event, because he thought it was just a bad idea. And he has very strongly and cogent arguments and I can see a lot of his merit. But the difficulty now is, once it has been announced that this type of testing is being done, then the next answer is, well, why not do what they did in the United States and why not publish the results? And this is going to cause some difficulty.
I would prefer it; however it’s being done, to be done either one way or the other. If you’re doing it – if you make a public issue out of it, it’s going to cause some difficulty. But there are strong arguments in Europe about doing it the same way as the United States. But it doesn’t fall into my area of responsibility as a commissioner – it’s a colleague of mine, Mr. Almunia, but I don’t think this debate is over yet.
MR. KEMPE: And the impact of what the U.S. has done on the debate in Europe – when you say it’s vexed?
MR. MCCREEVY: It has put a focus – if the U.S. hadn’t done this, there would be no pressure in the EU to go down this particular route, either. So while it has the effect of the U.S. doing it, if they said, well, why aren’t you doing a stress test, and I said, we are doing stress tests but it’s a different format, then people would say, well – the follow-on questions come. But, like, I’m certain the United States were doing it – if I were the United States government, it would have been the thing to do. I can really understand why they did it, because it makes very logical, common sense to me.
Q: Thank you so much for such simple remarks. My question is, I liked part of what you said earlier about the de Larosiere report. And – the Jacques de Larosiere report.
MR. MCCREEVY: Yes.
Q: And you mentioned EU is planning to upgrade our regulatory system. My understanding – you will create three new groups. I guess one for European banking authority, one for securities authority, the other insurance authority. My question is, how will you put in these new supervisory boards within the Commission? The second question is a regulatory question. The U.S. adopted a functionary regulatory regime; in contrast, the EU adopted, basically, U.K. and Nordic and German-adapted unitary regulatory regime. And I would be interested in your views: What do you think about Austrians or the Dutch adoption of “twin peak” regulatory regimes? Thank you.
MR. MCCREEVY: Well, due to the context, historically, that we have in Europe, some years ago, recognizing the different confidences, we set up committees to deal with banking securities and insurance. And we gave them these beautiful names that you’d think came from a James Joyce novel – books such as “Ulysses”; they’re known as SEBS, CIOPS and CESR – (laughter) – CESR standing for Committee of European Supervisory Regulators (sic), CIOPS standing for the Committee of European Insurance something-something, and CEBS standing for Committee of European Banking Supervisors.
Now, they do, all together, the relevant supervision of the 27 member states. And we’ve conferred to them some additional powers over the years, but the fact that they try to reach everything by consensus – they’re not, say, like the Fed or like the SEC and such – the design just is not like that on account of the structures, being in the EU, because we don’t have a – it’s not a central government.
We asked Mr. de Larosiere, who was former governor of the central bank of France and a very respected figure, to come up – to put a small group together to deal with these sort of supervision, thinking of cross-border institutions in Europe, because as your moderator knows well from his time in Europe, we’ve been developing for some years a single financial market in Europe.
We’ve been trying to do that, and we’ve been pretty reasonably successful – not perfect yet, but as we – in order that there’s a single financial market as the European goal. You can passport your product from country to country; you can operate from country to country. The difficulty about that is there are about 40-plus banking institutions that operate across borders and member states. Whereas we’ve encouraged a single market across the member states, our supervision of such bodies hasn’t followed the same way, because supervision still rests with the individual member states.
So we’re encouraging everybody to have a single market in financial services across Europe, but we don’t have a proper supervisory structure for them; the supervision of it is still national. So what do you do in a situation when a crisis would arise, with a bank, for example, that has operations in a number of member states of the EU 27? Who’s going to deal with the difficulty? And luckily, that hasn’t fallen upon us yet, but it is as sure as night follows day that this is going to happen.
So over many years, this issue has been debated. I’ve been finance minister since June ’97, and we have meetings every month – our colleagues the ECOFIN Council – and I will go to the ECOFIN Council as Commissioner. So certainly, for the last 12 years, we’ve been debating it in one form or another with very incremental and small-step progress. We asked if de Larosiere can chair a group. He can’t follow the recommendations with the Europe – the systemic risk council is one. And the second part, then, was – that was at the macro level – and then the deal with the micro level – he advocated those beautiful-sounding names that we had before, he recommended, converted them into authorities, giving them stronger powers of enforcement, et cetera, et cetera.
Mr. de Larosiere has advocated the setting up of three EU authorities to replace these three committees, and they’ll have more powers and more – within the confines of existing treaty – they’ll be able to enforce them more. And we’ll be putting a proposal on the table later this year as to what we intend to do and then a legislative proposal will follow with the autumn. Mr. de Larosiere – when we got Mr. de Larosiere’s report on the micro-prudential – the micro sort of business of these three new authorities, we thought about it for a while and we – to get over to your point – we have added to Mr. de Larosiere a coordination group for those three bodies, which is not in the de Larosiere report.
It’s something that we agreed our document last week to deal with the issue of how we were going to coordinate, how we’re going to deal with the three of them together. We put a little body above them, which is going to coordinate their particular activities. So that is not in the de Larosiere report, but is in our communication on what we intend to do. And on the second question, I – in my home member state, I was involved in setting a new structure for financial supervision, and I learned – the biggest thing I learned is there wasn’t one magic bullet solution to doing it.
I looked across the United Kingdom, saw what they had changed; I looked at France, looked at Germany; I looked across to the United States; and I decided that there was not a magic bullet solution. So therefore, what is in different approaches of other countries that we mentioned, I think each country itself must work on its own salvation in this particular regard. And therefore, I don’t advocate just one particular solution because I learned that there was not just one solution.
MR. KEMPE: We’ll take one more question in the middle? Finish with a zinger.
Q: Rhian Chilcottfrom the Confederation of British Industry. Mr. McCreevy, I’d like to ask you a question about the other side of regulatory debate. The last couple of years, there’s been a lot of focus on harmonization, cooperation and all the great things that you spoke about, but we also know that all governments and all authorities use regulatory policies and regulatory principles as a source of competitive advantage, as, arguably, they should do.
Governments are there to create the right conditions for competitive industry. So in the financial markets dialogue, do you ever actually negotiate with a forked tongue, because on the one hand, you are trying to create harmonization; on the other hand, you’re trying to create competitive advantage? How do you square that circle?
MR. MCCREEVY: Well, I’m sure that the person from the CBI wouldn’t be referring to the fact that maybe, some people will allege that both the United Kingdom, in the guise of the city of London, and the IFSE in the city of Dublin, have enjoyed somewhat of a competitive advantage in regulations over the years, and since I was responsible for a lot of it in Ireland, of course, I couldn’t possibly comment about such a topic. (Laughter.)
But well, you see, I think it goes back to different cultures in different member states in Europe, for example, and maybe across the globe. And the only way in Europe we could have, say, single-type rules in every member state, will get sorted through by way of weaker regulation, rather than by a direct lack of options for the people. You can have a regulation with the same single rules. But the only way you’d really know that they’re effective is if you had a single body somewhere – planted somewhere – with the same people regulating it everywhere.
And there is no appetite in Europe to go down that particular road. Sorry – there is an appetite among some to go down that particular route in Europe, but the majority of member states and the majority of electorates wouldn’t go down that particular way, and I would not be an advocate of it, in any event. But my term finishes in another few months, so maybe someone else – the next person could be very strong in that view. And I think it is necessary to – I think the – at the extremity, if you go for competitive advantage, we’ll all have a race to the bottom, and that’s not in any of our interests, as we know.
But I think it is important to have a kind of competition on various fronts. I think, like – I’m going to give you the old – since I’m an Irish person I’m proud of it – in 1986, we had no financial services center at all in Dublin. Some people had the idea for some years. The government of which my party would have been the leading member, we went ahead with it. We grew it fairly substantially. It’s not this like London or Luxembourg, but it’s pretty important, leastwise, from a standing start that employs a lot of people. But then, maybe it’s the package we had.
It said to go up over the years, but I was there for a lot of it when we were small. The biggest package that people can’t deal with, as we used to say when we were small, that access to decision-making quickly, whereas the bigger – there was a lot of procedures and bureaucracy. We had not built up that great bureaucracy early on, and you could get decisions very quickly. And that certainly was a competitive advantage for us while we were small – we could afford to do that. Any problems that there are, we had the clearing committee who had dealt with the prime ministers, the parliament, et cetera, et cetera, who could clear decisions very quickly.
Very much changed now because when you become bigger, then the structures become more complicated, et cetera. That was a competitive advantage – not that we gave the rules any different; we could make decisions a lot quicker because of size. And I wouldn’t look – I don’t like when I hear people in Europe talking about uniformity, I know what those people mean. They want to have an advantage for themselves because they have more complex rules and I don’t go down that – I don’t believe that’s the proper way to go. But I accept there is a lot of validity in your question.
MR. KEMPE: Let me close with a couple of questions. Two key words – regulation and stimulus – which have not always brought the Atlantic together – on the question of regulation, I do remember a time not so far back when deregulation wasn’t such a bad word. It was – yeah, and I’m wondering whether this gets to the analysis of the causes. Are we in danger – is Europe in particular in danger – of analyzing the cause as under-regulation, exaggerating the role of under-regulation in the crisis, and therefore, seeing regulation – almost enabling an act for regulation. So will we come out of this over-regulated? Do we have a problem there? And is there contingent difference across the Atlantic?
The second is stimulus. And here, it gets to the question of, where is Europe’s growth going to come from and is Europe going to have to swallow some pride and go back into the stimulus game again? Partly, this is prompted by my look, a little bit, around the world and where’s the American consumer – is the growth going to come from the Chinese consumer; is it going to come from the European consumer? And so I’m having a lot of trouble figuring out where that next growth spurt comes from, and I’m left thinking that perhaps, we might have a situation where Europe might grab for some more stimulus.
MR. MCCREEVY: Well, on the first question about regulation/deregulation, like, just about when I joined the commission, I think, was the high point of, say, the mantra of deregulation. And because I went there and was known as a deregulator – or a less regulatory – let’s put that. I don’t like – it seems the mantle now is deregulation is a great bad word. Now, there are many, many people in Europe who – let’s be very frank about this – had to bite their lips for the last 25 or more years about deregulation, free markets, et cetera, and had to go along with it, but in my view, never, ever really believed in it – never, ever believed in it. And their glorious opportunity has now come – (laughter) – because we –
MR. KEMPE: They have been liberated.
MR. MCCREEVY: They have been liberated from this dungeon in which they’ve been placed and had to subvert or keep down their real, natural self. And in their view, the whole cause of the financial turmoil has been deregulation, free markets, et cetera, et cetera, et cetera. And this opportunity has been manna from heaven for them. And they – there’s probably a lot of them in the United States, too – but there are a fair lot in Europe, which I know, because they’re always getting out about me. That’s why I know them better than anybody else. (Laughter.)
But that being the case, I think we have to – I’d move in certain areas in the – I would think, try and do something rather than let us be run over by people who want to regulate everything out of existence. There are people who want to regulate risk out of the business. Well, if you do, you’ll end the capitalist system. Like, it’s a fundamental right – it’s what I like and I know the American Constitution not as well as you know, but I know lots of great things in the American Constitution. But one thing I’ve always advocated in the narrative that we should have in the Constitution is a fundamental right to go bankrupt.
And if you think about it, that is what keeps the business going. It’s the people’s right to get up on the Monday morning and say, I have a new idea about something, and I’m going to place some of my money – or I’m gong to convince some institution to give me money for this idea. If it’s right, we’ll all make money; if it’s wrong, he’ll go broke. But that’s what keeps, in my view, the system going. And what regulators and governments should do is mediation with as light a touch as possible. So that is my philosophy that is not shared by many –
MR. KEMPE: Is that what’s happened?
MR. MCCREEVY: Well, what’s happened has been, on account of this tsunami of problems – financial leading to economic – we are in danger, all over, of going too far in the other direction. I, for a moment, would accept that maybe, in certain areas, we really deregulated vastly too far, et cetera, et cetera. But that should be no excuse, then, for pulling the pendulum totally in the other direction. But in life, as you know, forgetting about business and everything, most of us – well at least, us Irish sinners, in any event, do – we usually go too far. (Laughter.)
We either drink too much; we holiday too much; we eat too much – whatever – until we get some correction mechanism put upon us. And the danger is always we go too much in that direction. And that is the real danger, both in Europe and farther afield, because if we go too far with over-regulation, we will definitely prolong the financial and economic down – definitely prolong it – and that’s a danger.
On the second question about stimulus, you’ll also remember, there’s not universal agreement in Europe about stimulus packages, either – in Europe. We have had a stimulus package in Europe, but it is not the same as Ireland, because every member state has its own responsibilities in this regard, and there have been, kind of, some differences of opinion there. There are, I think – it’s not being an optimist just to say this – there are signs of some economic recovery in parts of Europe. I think there are signs of it. There certainly seems to be some indications here in the United States that things are, so far, changing, at least from our perspective, we’ve seen that in any event.
MR. KEMPE: One hopes.
MR. MCCREEVY: What one hopes is the answer – I just – I have no better crystal ball than anybody here. But you’ve asked quite a – I don’t think – see in Europe, each member state in Europe has responsibility for its own economy, so if the French want the stimulus to be –
MR. KEMPE: Where does the growth come from?
MR. MCCREEVY: Well, hopefully, far away from here, things are going to – I’m hoping there will be loosening of policies there, I hope. The United States certainly has provided a fair economic and financial stimulus. There was, of course, another body of opinion that says both in Europe and the United States, there comes a time when all this is going to – the debts are so high, who’s going to be purchasing this stuff, et cetera, et cetera. But we’ll have to wait and see.
MR. KEMPE: Thank you, Commissioner McCreevy. We at the Atlantic Council are still in favor of a free market, whatever that, today, means. And thank you. It was a strong statement and excellent Q&A, getting into some of the micro issues that I think are incredibly important to the financial world, while also dealing with the macro issues that are probably important for all of us, going forward. Whether over-regulation or over-drinking, neither one of them leads to a happy outcome over the long term. So thank you very much for the time that you’ve taken with us. We wish you the best in your meetings this week with senior U.S. officials and welcome you back at any time.
MR. MCCREEVY: Thank you, it was very good to be here.
Transcript by Federal News Service, Washington, D.C.