Tuesday, 16 March 2010

Brussels and London in finance face-off

Tensions between the UK and the EU over finance rules seem to be coming to a head this week. No sooner had news broke today that British prime minister Gordon Brown is blocking EU efforts to increase financial regulation of hedge funds and private equity, than word was leaked that tomorrow the UK is going to get a very stern tongue-lashing about the size of its debt. Just two more examples of how when it comes to money, the English Channel is wider than the Atlantic.

Tomorrow the European Commission will tell the British government it must do more to cut its budget deficit, which is as large as that in Greece. Market watchers are growing increasingly concerned that once Greece has hit rock bottom speculators are going to turn to the UK's shaky financial system, hedging against the colossal debt. The UK is not part of the Eurozone therefor the EU has no power to exert control over the UK's plans or punish it, so the communication to come tomorrow could be considered more as "guidance". But it's very public "guidance" that will be humiliating for the Labour party.

The UK has already promised to cut its budget gap to 4.7% of GDP by 2014 (it's currently 12.7%). But the commission thinks this plan relies on overly optimistic economic forecasts. The timing of the criticism could not be worse for the governing Labour Party as it heads into a general election season, as the rival Conservatives try to paint Brown as someone who is mismanaging the UK's finances.

At the same time, Gordon Brown is blocking EU plans to crack down on hedge funds and other risky financial instruments. Brown is concerned that the increased regulations would damage the City of London, the financial centre of Europe. Many EU politicians on the continent, including France's Nicolas Sarkozy and Germany's Angela Merkel, say these types of investors have exacerbated the Greek crisis.

The UK government is said to be concerned that the draft rules unfairly penalize hedge funds from the US and offshore tax havens. And the London financial system is so closely tied to the US financial system, the government thinks it can't risk anything that might cut those ties. US Treasury Secretary Tim Geitner has expressed concern over the EU plan. British finance minister Alistair Darling came out from negotiations today triumphant, saying the proposed rules would have put Europe's "only global financial centre, London, at a competitive disadvantage".

For the time being the Spanish EU presidency has dropped the item from the agenda, so the UK has succeeded in stalling the item for now. If the Conservatives are elected in May, it is certain they will also not go along with the plan to increase regulation of risky financial instruments. And since the measure would require UK approval, it looks like it is effectively dead.

No comments: