Poul Nyrup Rasmussen, MEP, President of the Party of European Socialists (PES)

"Market alone must not rule our lifes"

Why we need a stronger control of the financial market by the state

If anyone had said six months ago there would be a wave of bank nationalisations and taxpayer bail outs across Europe, people would have said they were mad. Now it seems every day another bank needs saving. Every day more people are worried about their savings, their pensions, their insurance. And we regret to say it – but it must be said – there is a real risk that financial crisis will turn to economic crisis – and people may end up worried about their jobs as well as their money.

Something else has changed too. Now everyone more or less agrees that we need better regulation of the international financial market. Eighteen months ago when the SPD and the Party of European Socialists started talking about financial market reform people asked how we dared question the market. Brave is the person today who claims that everything is best left to the market. If one lesson has been learned it is that the market alone cannot rule our lives. We need more than ever before the classic social democratic deal between the market and fair rules for social justice.   

It's the Debt's Fault

Today’s financial crisis is the result of excessive and risky debt, and conflicts of interest, made worse by the lack of transparency in our money markets. While today Governments are concentrated on bail outs, nationalizing banks on the brink of collapse, and preventing financial meltdown we must not lose sight of the need for better regulation.

In an ideal world we would seek world-wide action to regulate the international financial markets. But we cannot afford to wait. The EU, as the world’s biggest economy, can take a lead. The EU must work in close cooperation with the US and others to move in a common direction, converging over time. That is why the Party of European Socialists opened talks with US Democrats on financial market reform more than a year ago and established a ‘Financial Market Reform Network’ with US and Japanese Democrats in June this year.   
  

Seven Pillars for a Bridge of Stability

What might a common direction be? On which pillars can we build a bridge to better financial regulation? We propose seven pillars:

1. Universal legislation covering all financial players: many investment banks and prime brokers, and all hedge and private equity funds are exempt from the rules of transparency and disclosure that apply to the rest of the market. As they account for over two thirds of all new debt, it is obvious they need better regulation if we are to avoid new debt crises. Supervision across the financial markets must also be reinforced.  
2. Transparency and disclosure including of debts, amounts of fund and sources of funds, identification of large shareholders, executive pay and bonuses for all investment products including private equity and hedge funds 
3. Compulsory ‘capital requirements’ for all financial players, like those that already apply to banks and insurance companies. This means that to reduce extreme risk taking and excessive debt all financial players need to have and keep a certain amount of capital.
4. Rules to prevent excessive borrowing – including excessive debt caused by ‘leveraged buy outs’ - and to protect viable companies from too much capital being paid out to shareholders or to service debt
5. Limits on pay and remuneration, and mechanisms to ensure that earnings reflect losses as well as profits
6. New rules to prevent conflict of interests
7. Protecting workers interests such as by ensuring that employees are informed and consulted during all takeovers including leveraged buy-outs and by obliging pension funds to inform employees how their pensions are invested

Many but not all of these proposals are featured in the Rasmussen Report adopted recently by the European Parliament. The report was a compromise between socialists, conservatives and liberals and did not contain everything we wanted. For example, socialists proposed a publicly owned European Credit Rating Agency which would offer genuinely impartial advice on credit worthiness. This was rejected by the Christian Democrats and liberals. Socialists proposed a system of registration and authorization for managers of hedge and private equity funds. This was rejected by the Christian Democrats and liberals.  Socialists proposed a common European Financial Supervisory Body. This was rejected by the Christian Democrats and liberals. We will keep fighting for these and other changes that are still needed. But first we need to convince the European Commission to act on these modest proposals.    

Battling Recession in an Active Way

In addition to reform of the financial market we need an investment plan across Europe to fight the risk of recession. Every day growth forecasts are lowered and the risks of job losses increase.   We need investment in smart, green growth – with new jobs in renewable energies, energy efficiency, new public transport infrastructures.

Bailout today. Action to fight a recession must follow very quickly. Financial market reform must follow too.    

Poul Nyrup Rasmussen wrote this article for hbpa.