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European Commission

Michel BARNIER

Member of the European Commission, responsible for Internal Market and Services

Making financial centres contribute to the wider economy

European Financial Centre Roundtable / Brussels

6 September 2012

Five years after the start of the financial crisis, the economic situation in Europe remains fragile:

  • Zero growth is expected in Europe this year.

  • Unemployment in the euro area is at 11 per cent. And above 22 per cent for young people.

  • And many companies have trouble finding finance for new projects.

The June European Council has agreed on significant measures to step up Europe's financial governance. For the first time, we have a comprehensive agenda to address Europe's challenges.

More specifically, the Council has agreed to:

  • build a banking union;

  • increase budgetary integration; and

  • achieve a genuine Economic and Monetary Union.

These are bold steps.

However, we should not forget that Europe's financial centres also have key roles to play in the post-crisis recovery in at least three aspects:

First, they should be capable of meeting the needs of and supporting their economies and societies. The quality of services they provide to domestic firms is essential to the efficiency and competitiveness of their countries.

Secondly, financial centres should be key elements of the European single market.

But their role should go much further than only facilitating free movement of capital.

More specifically they should perform at least the following functions:

  • They should support and strengthen the connections across a wide range of economic sectors.

  • They should provide employment opportunities in all types of services typically present in a financial centre.

  • They should contribute to true innovation and productivity.

  • And lastly - they should be Europe’s gateways to the global financial markets. As such, they have the potential to improve the efficiency of Europe’s economy and help us compete globally.

As a final point, we cannot forget that Europe's financial centres are a central part of the global financial system. This is because they provide a global hub for financial institutions, firms and investors. And - as such - they secure for everyone the benefits that wider, deeper and more integrated markets can offer.

In this context, a very important question needs to be asked: How can we ensure that Europe's financial centres are able to rise to today's challenges?

My answer to this question is based on two main pillars of reform:

First, we need to stabilise the financial sector and re-establish confidence.

Second, we need to put in place measures to ensure the financial sector supports healthy growth and investment.

Let me say a little more on this reform starting with the first pillar.

The EU is approaching the end of its largest ever programme of financial services reform. Financial markets have been at the heart of the recent financial crisis.

The crisis exposed serious inadequacies, such as:

  • regulatory gaps;

  • inadequate supervision;

  • poor corporate governance and short-termism in financial institutions;

  • opaque markets; and

  • overly-complex products, especially derivatives.

As a result, it became clear that the financial services sector could not escape reforms.

Moreover, the experiences during the crisis have clearly demonstrated that we need common European rules.

The so-called single rulebook will contribute to creating a more stable, transparent and competitive financial sector in Europe.

Against this backdrop, around thirty targeted measures have been proposed by the European Commission. My goal is for all new legislation to be in force by 2013.

This considerable reform programme now addresses all the key commitments agreed at the G20. It puts Europe at the forefront of the global effort to positively transform the financial sector and financial centres.

Ladies and gentlemen,

Some commentators criticise the EU financial reform agenda. They argue that the new rules :

  • are excessive,

  • create unnecessary red tape and

  • impose significant costs on financial institutions,

all this to the detriment of economic growth.

I have three answers to give to these arguments:

1. First, let's not forget that what we are doing in the EU is part of a joint, international effort to stabilise the financial sector.

2. Secondly, there is no one silver bullet to address all the shortcomings that contributed to the crisis.

Instead, a series of targeted measures is needed to reform financial institutions, infrastructures and instruments.

3. Lastly, each of our proposals is carefully calibrated to be bearable for the financial sector and to support the real economy.

In particular, we are careful to allow time for financial institutions to adapt to new requirements. For example, we have proposed that the new bank capital requirements should only enter into force at the end of this decade.

We have also paid great attention to the economic impact of our reforms, especially on SMEs. For example, our proposal for revised legislation on securities markets will be beneficial for SMEs seeking funding via financial markets. This is thanks to the SME labels and more relaxed rules on listing and reporting.

This brings me to the topic of sustainable growth, which is the second pillar of our reform programme.

Bringing Europe back to the path of sustainable growth requires taking up a series of challenges. Amongst them:

  • We need to build modern digital, energy and transport infrastructures.

  • We need to support the development of innovative technologies.

  • And we need to tackle climate change and population ageing.

All these challenges require long-term financing.

Now, given the state of public finances, it is clear that not all long-term financing needs can or should be met by European taxpayers.

Here again the financial centres have a key role to play.

They should perform at least three tasks:

  • First, they need to provide a stable platform for institutional investors such as pension funds and insurers to match their long-term liabilities with long-term assets;

  • They should also offer safe and profitable vehicles for household savings;

  • Lastly, they need to support sustainable, green and socially-responsible economic growth.

In this respect, my services are currently examining how to ensure the financial sector is fulfilling these roles as efficiently and effectively as possible.

And I plan to launch a broad consultation on this subject around the end of the year.

In the meantime, I have already taken action in relation to investment funds, which play a crucial role in financing the European economy.

More specifically, the Commission has proposed to create a European market for venture capital and socially-responsible investment funds. Such a market will allow these funds to raise money and to invest anywhere in the EU. This will increase chances for start-ups and companies involved in social and environmental activities.

I also want to build further on the success of the UCITS brand. Some Member States have rules in place which facilitate access to long-term investments in private companies for retail investors. Drawing on this experience, my services are currently reflecting on whether an EU approach in this context could also help boosting growth in Europe.

Ladies and Gentlemen,

Before I conclude, let me say a few words about the reforms that are still to come.

Our original financial regulation programme may be nearing completion. But the reform process is not yet over as new challenges and priorities emerge. Therefore the process of transformation in Europe's financial sector needs to continue.

Let me mention three issues that we will need to deal with in the next few months:

First, the European banking union

It is needed to break negative interconnections between banks and governments.

Following the June European Council, the Commission will shortly present a legislative proposal to establish a single supervisory mechanism as an essential first step towards this.

Second, the structure of the EU's banking sector

Interesting work has been launched at national level. Such as the Vickers Report in the United Kingdom or the Volcker Rule in the United States.

But in a truly integrated single market, we need to work these things out together.

That is why I have set up an independent High-level Expert Group headed by Erkki LIIKANEN, Governor of the Central Bank of Finland.

The Group is finalising its work in October. The Commission will then evaluate its recommendations and respond as appropriate.

Third, shadow banking

Non-bank credit activity performs important functions in the financial system. It creates additional sources of funding and offers investors alternatives to traditional bank lending.

However, as the crisis has demonstrated, shadow banking can also pose potential threats to long-term financial stability.

Following the Commission consultation earlier this year, I will decide on the appropriate next steps, including legislative measures - if necessary.

Ladies and gentlemen,

The new challenges I have just mentioned are yet another reminder that growth and stability are two equally essential reform pillars.

They also remind us that we need to be alive to potentially unintended consequences of our reforms. We need to continue to assess their impact and stand ready to adjust our proposals if necessary.

The driver behind our agenda has always been the growth of the real economy and the need to support European competitiveness.

To achieve this, we need a competitive, strong and healthy financial sector, rooted in successful, responsible and safe financial centres.

Therefore, we need to pursue the reforms to make sure that Europe's financial sector and its centres can perform their national, European and global tasks in a safe, efficient and effective manner.

We have made a lot of progress to date, but there is still more to do.

And I intend to see it through.

Thank you for your attention.


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