On October 2, 2012, a panel of experts in the E.U. issued its recommendation that banks quarantine their risky trading activities (i.e., proprietary) from their deposit and lending “commercial banking” operation as a way to safeguard the financial system and avoid future bailouts by taxpayers. If enacted into federal law, the proposal would force banks to put their proprietary trading activity in a separate unit, subject to higher capital requirements. This is similar to the approach of the Dodd-Frank Act of 2010 in the U.S., though that legislation may not include the firewall element. In other words, the approach falls short of the Glass Steagall Act, which was enacted in the U.S. in 1933 during the Great Depression and repealed in 1999 under pressure from Wall Street.
The European proposal faced two formidable obstacles, one of which pertains to the U.S. as well. In particular, the banking lobby and the legislative hurdles render the chances of passage too low, given the merits of the proposal. The implication is that E.U. policy makers might want to look at how to reduce the hurdles themselves.
The first obstacle can be characterized as the banking sector having too much weight, politically speaking, for the good of public policy in the E.U. The group’s proposals met opposition from major lenders, which want to avoid additional banking restrictions. This can be expected as the sort of knee-jerk reaction of a business to the prospect of additional costs from anticipated regulation. That the reaction itself is typically deemed as credible is itself a problem on both sides of the pond.
Even though there are more countervailing parties on the left to check the influence of business over public policy in the E.U. than in the U.S., the proportion of the financial sector in relation to the E.U. economy makes it difficult for lawmakers to delimit the activities of that sector unless the banks willingly go along with the change. Therefore, turning the Liikanen group’s idea into law would be “very difficult because of the power of large banking groups in Europe,” said Karel Lannoo, the chief executive of the Center for European Policy Studies.
Secondly, the nature of the legislative process at the E.U. level is cumbersome and even counterproductive. This is due to the inordinate concern for state rights (excessive from the standpoint of balanced federalism) and the democracy deficit in terms of putting the European Council above the European Parliament legislatively. Consider, for example, how the New York Times characterizes the procedure that the proposals would face legislatively:
“(T)he European Parliament would probably become involved. Ultimately, any specific measures might need the green light from each of the Union’s 27 member governments before they could take effect.” That the legislative chamber whose representatives are directly elected “would probably become involved” is itself a red flag from the standpoint of democracy. The state governments represented in the European Council are, to be sure, democratically elected, but to have those governments themselves as members of a council is a “second order” degree of democracy. Furthermore, that each government has a veto on such a proposal conflates legislation with constitutional amendment (and would be a stretch even applied to the latter), and ignores the fact that the E.U. had already been vested with some governmental sovereignty in the form of competencies. Qualified majority rule in a federal senate or council representing the state governments is more appropriate and fitting, given the nature of the E.U. and its responsibilities.
That “Europe is much more vulnerable to banking crises than the United States because of the size of the financial sector in relation to the economy” suggests that E.U. citizens should make sure to institutionalize checks on the sector’s political influence and reduce the legislative hurdles that could otherwise scuttle proposals geared to protecting the E.U. economy from the excesses of even and especially a dominant sector. In short, the E.U. Government should not be led by whichever sector is dominant, for such a plutocracy is not in the public interest.
James Kanter, “Europe’s Banks Urged to Keep Trading and Lending Operations Separate,” The New York Times, October 3, 2012.