Commission puts forward proposals to the European Council on sovereign wealth funds and financial stability

The European Commission has today adopted communications on sovereign wealth funds and on adapting European and global financial systems to better promote financial stability. These communications are the Commission contribution to EU leaders' discussions on these subjects at the Spring European Council on March 13-14. On sovereign wealth funds (SWFs), the Commission is proposing that EU leaders endorse a common EU approach to increasing the transparency, predictability and accountability of SWFs. This common approach will strengthen Europe’s voice in international discussions aiming to establish a code of conduct including standards in areas of transparency and governance. On financial stability, the Commission wants the European Council to confirm the principles which will guide the EU’s efforts to improve financial market transparency and reinforce prudential control and risk management, and to set out the broad lines of the action to be taken.

Commission President José Manuel Barroso said: “Europe must remain open to inward investments. Sovereign wealth funds are not a big bad wolf at the door. They have injected liquidity and helped stabilize financial markets. They can offer reliable long-term investments our companies need. To ensure this, we need global agreement on a voluntary code of conduct – it is to this end that we make a contribution today. It must avoid some funds being run in an opaque manner or used for non-economic objectives. The EU should take a common approach, without different responses from Member States that could fragment the single market. I have already made clear that we may propose European legislation if we cannot achieve results by voluntary means. On international financial markets in general, we are asking EU leaders to confirm loud and clear that Europe will take an effective common approach to tackling the weaknesses exposed by the recent turmoil.”

Sovereign wealth funds

The Commission's communication on sovereign wealth funds proposes to EU leaders a balanced and proportionate common EU approach, to protect legitimate policy interests without falling into the trap of protectionism.

The overall aim is to maintain an open investment environment while enhancing the transparency, predictability and accountability of SWFs' investments. This requires obtaining greater clarity and insight into the governance of SWFs and improving the quality of information they provide to markets on their size, investment objectives, strategies and source of resources.

The EU should be a driving force furthering international work in this respect. In October 2007 G7 Finance Ministers invited international organizations, notably the IMF and OECD, to launch a reflection on SWFs. The IMF is developing a code of conduct for SWFs, in cooperation with their owners. The OECD is identifying best practices for recipient countries. The common approach set out in the communication should be the EU's contribution to these international efforts.

The communication sets out five principles:

commitment to an open investment environment both in the EU and elsewhere, including in third countries that operate SWFs;
support of multilateral work, in international organisations such as the IMF and OECD;
use of existing instruments at EU and Member State level;
respect of EC Treaty obligations and international commitments, for example in the WTO framework;
proportionality and transparency.

The Communication goes on to spell out some basic governance and transparency standards that should be included in a voluntary code of conduct for SWFs to be agreed at international level, building on the current work done by the IMF. An internationally agreed voluntary code of conduct is the most effective and proportionate way to address concerns over possible risks that the cross-border operations of some SWFs could interfere with the normal functioning of market economies.

Among the main concerns are that some SWFs operate in an opaque manner, without disclosing for example the value of their assets, investment objectives and the nature of their risk management systems. There are also concerns that SWF owners may use them to further strategic interests, rather than normal commercial interests, thus both distorting markets and posing potential security problems for the EU and its Member States.

The common approach the Commission is putting forward will avoid an uncoordinated series of national responses that would fragment the internal market and damage the European economy as a whole. It will also help advance the EU's trade goal of opening third country markets to EU investors. This would be more difficult if the EU was seen as imposing unjustified barriers within Europe. The Commission asks the European Council to endorse this approach and make it the basis to encourage recipient countries to keep their market open and provide clear guidelines towards access to investment and SWF owners to reach agreement on a code of conduct, preferably by end 2008.

Financial stability

The ECOFIN Council agreed in October 2007 a road map for reinforcing European and global financial regulation and supervision to fill the gaps revealed by recent financial turmoil in the wake of the US sub-prime crisis. The road map is based on four key areas of work: improving transparency; valuation of financial products, strengthening prudential requirements and making markets function better.

Today’s Commission communication on financial stability asks EU leaders at the Spring European Council to build on this road map and “go one step further” by confirming at head of state and government level the principles which will guide the EU internally and in international fora.

Those principles should include: primary responsibility for managing risk rests with individual financial institutions and investors; national regulatory and supervisory frameworks must be equal to the task of coping with rapid change and innovation in financial products; cooperation between regulatory authorities in the EU and globally must be stepped up.

The Commission also wants the European Council to endorse a series of lines of action both in terms of internal policy and in international fora. These include:

improving information provided by credit ratings agencies, by taking regulatory measures if the agencies do not act voluntarily;
updating accounting and valuation rules, so that full information on the exposure of banks and other financial institutions to off-balance sheet vehicles is made available;
encouraging prompt and full disclosure of losses by financial institutions;
improving early warning systems on financial stability;
fostering the effectiveness of EU networks of financial supervisors and ensuring strong and effective supervision of cross-border groups;
working on a common framework for assessing the systemic implications of a potential crisis.

The Commission wants a political agreement with the Council and the European Parliament to deliver the necessary legislative changes before April 2009.

The Communication stresses that while action in the above areas is essential, the European economy is responding relatively well to turmoil in financial markets, the US slowdown and high energy and commodity prices. Despite some downward revision in the Commission’s recent interim economic forecast projected growth remains at 2% for the EU. Reforms under the Lisbon Growth and Jobs Strategy have made Europe’s economies more resilient. The next cycle of the Lisbon Strategy, which the European Council is expected to endorse, will provide additional security against any future turbulence in international markets.
More details of both communications are in MEMO/08/123 and MEMO/08/126 and the texts will be made available as soon as possible via:

http://ec.europa.eu/commission_barroso/president/index_en.htm