On 19-20 March the EU leaders met in Brussels for the spring European Council. The European Council is confident that the EU is able to tackle the financial and economic crisis. According to the EU leaders “By acting together, the EU can put its financial sector on a sound footing, get credit flowing to the real economy and protect its citizens from the worst impacts of the crisis. Measures taken to support recovery can also be shaped to help the EU to build a stronger economy for the future.”
The Community facility providing medium-term financial assistance enables loans to be granted to one or more Member States experiencing difficulties in their balance of payments on current or capital account. Solely those Member States that have not adopted the euro may benefit from this facility. The outstanding amount of loans to be granted to Member States under this facility was limited to €12 000 million. Last December, the maximum ceiling of the facility was raised to €25 000 million.
In order to deal with their balance of payments Hungary (€6.5 billion) and Latvia (€ 3.1 billion) have already received around €10bn and Romania will follow.
José Manuel Barroso had suggested to the European Council that the EU should double the emergency funding ceiling to €50bn.
Jean-Claude Juncker, the prime minister of Luxembourg, has said "I wonder if increasing this would lead to potential recipient countries leaning back and neglecting their homework because they know that there is a European way out for them." Germany also believed that such increase was not necessary but in the end Angela Merkel agreed to raise the ceiling.
The European Council has stressed “the solidarity between Member States as a fundamental value of the EU.” The EU leaders have therefore agreed to double the emergency funding ceiling to €50bn to help non-eurozone member states with their difficulties in their balance of payments. The European Council Conclusions read “(…) the Community stands ready to provide balance of payments support for eligible Member States that need it and, to this end, welcomes the Commission's intention to make a proposal for doubling the ceiling for the Union's support facility for balance-of-payments assistance to €50 bn.”
On 2 April it will take place in London the G20 summit which is expected to coordinate a global response to the crisis. The European Council stressed that “The G20 Summit in London has a crucial role to play in reshaping the global financial system and rebuilding the confidence of economic actors across the world.”
According to US officials the EU stimulus plans are insufficient to tackle the crisis, consequently they believe that injecting large amounts of additional public money into the economy is, now, the main priority.
The US administration has been pressure the EU to contribute more to global efforts at recovery through economic stimulus. The US has called for the EU to raise its budgetary stimulus to 2% of GDP.
The UK has been generally in favour of pumping more money into its economy. However, France and Germany are strongly opposed to a larger stimulus. In fact, France and Germany united forces and agreed that the forthcoming G20 meeting should focus on greater financial regulation rejecting, in this way, the US calls.
In a joint letter to the Czech EU presidency and to the president of the European Commission, on 16 March, Angela Merkel and Nicolas Sarkozy wrote "The first priority is to build a new global financial architecture. The European Union must assert a common position and take the lead on this issue." Nicolas Sarkozy and Angela Merkel want from the G20 meeting “Concrete results” for further action to strengthen international financial regulation. The letter states “The EU shall propose that all hedge funds and other private pools of capital which may pose a systemic risk must be brought under appropriate registration, regulation and supervision.”
Last December, the European Council adopted a Recovery Plan which calls for a co-ordinated fiscal stimulus of €200 billion equivalent to 1.5% of the EU´s GDP however the EU leaders have stated that the economic stimulus measures in 2009 and 2010 worth 400 billion euros representing 3.3 percent of the EU's GDP which takes into account automatic stabilisers, the budgetary effect of unemployment and welfare spending.
Mirek Topolánek, the Czech prime minister said: “Some haven't implemented their national recovery plans yet, and this is why we still don't know what their impact will be. It is therefore meaningless to start adopting any new rescue packages.” According to the European Voice Jean-Claude Juncker, the prime minister of Luxembourg, said: “We want the G20 meeting to focus on financial markets regulation…That is one of the reasons why we told the Americans that we don't want to discuss stimulus packages: we want to sort out the financial markets first.”
The EU leaders have rejected calls from the Obama administration to increase their stimulus package insisting that the estimated €400 billion they are spending is enough. The European Council Conclusions reads “Good progress has been made in implementing the European Economic Recovery Plan adopted last December. Although it will take time for the positive effects to work their way through the economy, the size of the fiscal effort (around 3.3% of EU GDP or over €400 billion) will generate new investments, boost demand, create jobs and help the EU move to a low-carbon economy.”
The European Council has defined the Union's position with a view to the G20 Summit in London on 2 April calling for more regulation of the financial markets. The EU leaders adopted a specific annex to the conclusions entitled “agreed language with a view to the G20 Summit in London.”
The EU leaders want to “continue international coordination of fiscal stimulus measures. Implement swiftly planned fiscal stimulus packages. (…) Give priority to restoring the functioning of credit markets and facilitating the flow of lending to the economy, which is crucial for the effectiveness of fiscal stimuli.”
The European Council agreed that the IMF's resources should be “Very substantially increase (…) so that the Fund can help its members swiftly and flexibly if they experience balance of payments difficulties.” According to the European Council Conclusions “(…)The EU Member States are ready provide on a voluntary basis a fast temporary support of IMF lending capacity in the form of a loan to a total amount of EUR 75 bn.” Such amount would be the EU´s contribution to the general increase in IMF funds, which still has to be agreed. The EU leaders also agreed that the IMF´s system of governance should be reformed. According to the conclusions “Reform the IMF so that it reflects more adequately relative economic weights in the world economy and review the process for the selection of top management for IFIs by making it more transparent and merit-based.”
The European Council has expressed the need for more tighter financial regulation. The US has been rejecting more regulation and Gordon Brown is trying to please both calling for larger stimulus packages and supporting the need for more regulation.
As George Parker from the Financial Times said he “(…) signed up (…) to a sharp tightening of European financial regulation, including some measures that he spent the best part of a decade opposing during his time as Britain's chancellor of the exchequer.”
The European Council called to “Strengthen transparency and accountability to avoid pitfalls of the past, in particular by making macro-prudential supervision a standard part of the financial sector oversight.”
The EU leaders agreed to ask the G20 to “Ensure appropriate regulation and oversight of all financial markets, products and participants that may present a systemic risk, without exception and regardless of their country of domicile.”
The EU leaders commit to regulate hedge funds, private equities, credit derivatives and credit rating agencies. According to the summit conclusions “Subject credit rating agencies to proper regulation and supervision in an internationally consistent manner, to ensure quality and transparency of ratings and avoid conflicts of interest.”
The European Council wants to “Enhance the transparency and resilience of credit derivatives markets, especially by promoting the standardisation of contracts and the use of central clearing counterparties, subject to effective regulation and supervision.”
Moreover, the EU leaders called the G20 to “Protect the financial system from non-transparent, non-cooperative and loosely regulated jurisdictions, including off-shore centres” as well as to “Request the listing of such jurisdictions taking account of recent developments and develop a toolbox of sanctions that permits the application of appropriate and gradual countermeasures.”
The EU will ask the G20 to adopt sound common principles on corporate governance and remuneration practices in order to prevent that compensation schemes incentivise excessive risk taking. According to the EU leaders “Compensation schemes should be reviewed by supervisors, backed-up by an effective enforcement regime.” The European Council also calls for improved regulation relating to banks' capital.
