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Ladies and gentlemen,
I welcome the opportunity to be with you tonight. The work of the Transatlantic Policy Network over the past 15 years has demonstrated a remarkable commitment to promoting co-operation between Europe and the United States. I hope our discussion here this evening will help in some small way to further strengthen EU-US co-operation.
I have been asked to focus my introductory remarks on the EU-US financial markets regulatory dialogue and to consider how this informal arrangement for co-operation might be converted into what has been termed "a longer-term roadmap for transatlantic financial integration". This is quite a challenge for a 10-minute intervention. But, I will try to meet that challenge by structuring my remarks around three questions.
- My first question relates to the motivation for deepening the financial regulatory dialogue. Why should we - and here I mean both the US and the EU - be interested in promoting transatlantic financial integration? After all, the US is already the dominant financial market in the world and the EU is still, to a large extent, integrating its own national financial markets.
- My second question relates to method. What realistic steps can we take to enhance the EU-US financial regulatory dialogue relative to what exists today?
- My third question relates to process and procedure. Should a deepening in the regulatory dialogue necessarily imply a greater formalisation of the current arrangements?
Let me begin with the first question. Why should the EU and the US be interested in transatlantic financial integration?
It is, of course, a cliché to say that the modern world is a global village. But, nowhere is this cliché more valid than in the context of the international financial system.
The scale of financial flows around the world leaves us in no doubt about the interdependencies that now exist between different economies. The United States and Europe are the two main players in the international financial system, with substantial investment flows – both direct and portfolio - between the two economic areas. To illustrate, let me quote just a few statistics from a recent study prepared for the Commission on capital-market relationships between the EU and US.
- In 2004, the US and EU accounted for a combined 80% of all foreign direct investment in the world, 80% of the international debt securities market, and 65% of the cumulative international equity issuance since 1987;
- In 2003, US investors held about $947 billion of equity, $405 billion of long-term debt and $152 billion in short-term debt in the EU;
- The corresponding figures for EU investor holdings in the US were $781 billion of equity, $768 billion of long-term debt and $142 billion in short-term debt.
The scale of these cross-border holdings is impressive. Given our combined weight in the international markets, one might expect EU-US bilateral exposures to be higher.
Needless to say, we in the EU have made major progress in this regard since 1999, helped by the introduction of the euro and the progressive implementation of the Financial Services Action Plan. The EU now has money markets, government bond markets, and derivatives markets that are comparable in size with the corresponding US markets. Investors and issuers alike are adopting more EU-based strategies, as opposed to purely national strategies in the past and we increasingly see the emergence of powerful pan-EU financial institutions.
Despite this success, the process of EU financial integration cannot be taken in isolation from the broader process of globalisation. As in many other policy areas, the EU cannot afford to be introspective in its approach to financial integration. The factors driving integration in EU financial markets – such as liberalised capital movements, advances in information technology and innovation in financial products and techniques – are also at play at the global level. And, this global dimension has important implications for how the EU builds its single market.
In a context of global financial integration, adopting rules and standards that suit the EU alone can no longer be the objective. If the benefits of global financial integration are to be exploited fully, the EU must take into account how our rules and standards interact with those elsewhere. Similar considerations apply to the US authorities, as they seek to manage the development of their domestic financial market. With this need for global consistency in mind, the importance of a productive EU-US financial regulatory dialogue should be clear to all.
This brings me to my second question. What realistic steps can we take to enhance the EU-US financial regulatory dialogue?
The original aim of the regulatory dialogue was to address spillover effects of legislation in each other's jurisdiction. The form of the dialogue is informal and confidential, allowing for straight-talking but in a non-confrontational environment. While I myself do not participate in these meetings, my colleague Charlie McCreevy regards the dialogue as a highly successful formula. This view is confirmed by the notable progress achieved on issues such as:
- De-registering of listed companies with the SEC (Security and Exchange Commission);
- co-operation on auditing supervision; and
- accounting standards.
This list points to the scope of financial activities covered by the dialogue. The list is, however, only a subset of the issues that are likely to arise as transatlantic financial integration proceeds. For example, the ongoing merger discussions between Euronext and the New York Stock Exchange (NYSE) have already brought to light new issues that were not even envisaged a year ago.
So, a first improvement in the dialogue must be to prepare for an expanded agenda as transatlantic integration proceeds. An expanded agenda means a heavier workload and will inevitably imply the allocation of more time and resources to the dialogue. Both sides must be prepared to invest in terms of deeper technical analysis and possibly even exchanges of personnel. This, in turn, will require a greater political commitment to the process.
Of course, the possibility for compromise can be constrained by factors beyond the control of those participating in the dialogue. This is particularly the case when the dialogue is seeking to resolve regulatory differences that are based in existing law. Clearly, it is neither possible nor desirable, that the regulatory dialogue should result in actions that undermine or subvert the provisions of Parliamentary or Congressional laws. For this reason, it is essential that the dialogue should begin early in the regulatory process – when measures are being considered and not after they have been adopted. This so-called "upstream consultation" is increasingly a feature of the dialogue and should be encouraged. As ever, prevention is better than cure.
Before concluding, let me turn briefly to my third question. Should a deepening in the regulatory dialogue imply a greater formalisation of the current arrangements?
This question is inspired by the phrase "longer-term roadmap for transatlantic financial integration". For me, a roadmap is a formal concept and brings to mind a combination of binding commitments, clear timetables, and specified deadlines. Roadmaps can be very useful devices in the process of financial integration. This is clearly demonstrated by the success of the EU Financial Services Action Plan. But, I wonder if the time and context are right for the conversion of the EU-US regulatory dialogue into such a formalised process. It should be recalled that the Financial Services Action Plan was agreed and implemented as one part of a much broader process of EU political and economic integration that has been underway for decades.
My own instinct is that the informality of the current EU-US dialogue is one of its great strengths. Participants come to the table to seek mutually acceptable solutions, rather than to formally negotiate. Informality allows candid discussion and allows political sensitivities to be put aside. In this way, there is less risk of the dialogue degenerating into a – probably fruitless - struggle between entrenched interests. Formalisation of the dialogue would also increase the risk of "contagion" from EU-US negotiations in other areas. Such contagion could embroil the process of financial integration in the sort of "tit-for-tat" battles that have too often characterised the transatlantic trade relationship.
In conclusion, I would like to thank you for allowing me to share my views on the future of transatlantic financial integration. I believe your network continues to have an important role to play in promoting the integration process and I look forward to our discussion.
Thank you for your attention.
