Will the financial markets really be tamed?

12 May 2011
Article

Three years since the outbreak of the global financial crisis, the banks are back making mega-profits while the burden has clearly shifted to citizens and workers. However civil society action at European level could still make a difference in reining in the financial sector.

TNI fellow, Myriam van der Stichele in SOMO's EU financial reforms newsletter summarises defeats and partial victories against the all-powerful financial sector and opportunities for action in 2011 and 2012.

Transfer of debt burden from private to public sector

The austerity agenda that has swept across Europe has been promoted by political leaders who argue that debts have become unsustainable. They don't mention that this public indebtedness has been caused first by governments taking on the debt of their private banks and second due to falls in revenue prompted by the financial crisis.

The latest country to suffer is Portugal, which has had to request financial assistance because the financial markets stopped providing adequate financing. Held hostage by financial markets speculating against the Euro in the most indebted European nations, the EU has protected private banks from default and done the banks bidding by imposing stringent budgetary disciplines on Greece, Ireland and Portugal.

Rather than forcing banks to pay the costs and imposing rules against speculation, member states have agreed to reduce wages, increase pension age and cut public spending. Across Europe, there is growing public mobilisation against cuts for the poor and bonuses for the banks.

Regulation and supervision of (agricultural) commodity derivatives markets up for discussion in the EU in May 2011

The EU decision-making process about a part of the derivatives markets is in its last stages. The risky and the speculative aspects of derivatives that are bilaterally traded (‘over the counter’, ‘OTC’) in a non-transparent way contributed to the financial crisis. They also include (agricultural) commodity derivatives trading, which is considered to contribute to speculation, price volatility and spikes in food prices.

The new EU legislation aims at making derivatives trading more transparent –which will clarify their role in speculation-, and more safe, through a system of insurance against non-payment (‘clearing’). Both the co-decision makers, the EU Ministers of Finance and the European Parliament (EP) have to decide and agree among themselves on a final legal text. The EU Ministers of Finance are planning to take a political decision at their Council meeting of 17 May 2011. The first vote at the EP will take place at the Economic and Monetary Affairs Committee (ECON) on 24 May 2011. Civil society has already had some influence on the draft EP text.

There is also a growing international campaign to end all speculation in the financial food commodity derivatives market.  Join the campaign through www.makefinancework.org to remove the flaws and loopholes that allow further food and commodity price speculation.  

European Parliament (EP) votes for Financial Transaction Tax (FTT)

Progress has been made towards introducing a Financial Transaction Tax at EU level after the EP voted in favour, under pressure from a strong campaign by civil society and trade unions.

A Financial Transaction Tax could generate 200 billion Euros at European level and help curb speculation. Some member states such as Germany are also in favour of an FTT in EU or Euro countries, even if it is not agreed at international level. However the European Commissioner responsible for taxation is against such an FTT.

There are several official EU reports in the pipeline on different options for taxing the financial sector, but ongoing public pressure will be critical to convert this long-demanded action by civil society into reality.

Reforming banks: still a long way to go

Many discussions on how to re-regulate the banks are still on-going. Measures that are being debated include how to avoid bailing out banks with taxpayers’ money. A new ‘stress test’ of European banks is being conducted to ensure that banks are currently stable enough. Some argue that the EU or its member states should require that banks hold higher capital reserves than the new international standards (‘Basel III’).

However breaking up banks that are too big to fail is still not on the EU’s political agenda.  Measures to stop disruption of the financial system by collapsing banks have also not been agreed; nor on how to prevent banking activities being done through un-regulated ‘shadow banks’.

What is currently lacking in any of the European official debate is how to integrate measures that would make banking more socially and environmentally sustainable. Friends of the Earth has launched a campaign that can be joined at www.makefinancework.org/home/sustainable-banking

Poor progress at the April meeting of the G20 Ministers of Finance

When the G20 Ministers of Finance met 14-15 April 2011, they made little progress on how to control imbalances between surplus and deficit countries related to trade, currency reserves, budgets, etc. They also did not agree on some important outstanding issues such as dealing with financial conglomerates that are too big to fail. The G20 decisions provide an important context in which EU financial reforms take place (or not).

New EU initiatives to tackle tax evasion and tax illegal capital flows from developing countries

Initiatives are being discussed at the EU to stop tax evasion in developing countries and stop tax-related illicit financial flows from developing countries to the North. The European Parliament has been more ambitious than the European Commission and adopted two progressive resolutions in March 2011. Proposals are most advanced on the issue of country-by-country reporting, whereby multinationals have to report what taxes they are paying in each of the countries they operate.

Calendar of events

Important dates and events by governments and civil society (although not complete) are  summed up in chronological order at the end of the Newsletter, to allow monitoring and advocacy (see: http://somo.nl/dossiers-en/sectors/financial/eu-financial-reforms/newsletter-finance/april-2011/renderTextHTML#calendar-of-official-events).

Potential to influence policy

The potential for civil society to re-regulate the financial sector has been shown most clearly in the vote by the European Parliament in favour of an FTT at EU level and the growing demands for transparent and well-regulated financial commodity derivative markets. These victories are down to civil society organising effectively and ensuring that the public voice in favour of reform was clearly heard. It will be crucial to remain mobilised to push for further changes to banking and derivatives market reforms due to be discussed by the EU this year. The weaknesses of the current EU financial reforms will otherwise remain a threat to Europe.

> Full SOMO newsletter on financial reforms