EU's RUNAWAY TRAIN How the EU neglected principles of openness and accountability in its reaction to the financial crisis

 
EU's RUNAWAY TRAIN How the EU neglected principles of openness and accountability in its reaction to the financial crisis
EU’s RUNAWAY TRAIN
   How the EU neglected principles of
   openness and accountability in its
     reaction to the financial crisis

Ondřej Krutílek
March 2012
EU’s RUNAWAY TRAIN

How the EU neglected principles of openness and
accountability in its reaction to the financial crisis

                                        Ondřej Krutílek
New Direction – The Foundation for European Reform is a free market, euro-realist think-tank established in
2010 in Brussels and the UK affiliated to the Alliance of European Conservatives and Reformists (AECR).
New Direction Foundation seeks to promote policies and values consistent with the 2009 Prague
Declaration to help steer the European Union on a different course and to shape the views of governments
and key opinion formers in EU member states and beyond.

The Centre for the Study of Democracy and Culture (Centrum pro studium demokracie a kultury, CDK) is an
independent, non-profit educational and cultural organisation (think-tank) established as a civic association
in August 1993 in Brno. CDK is founded on the work of earlier initiatives devoted to the development of
independent activities and the publication of samizdat magazines before 1989.

Ondřej Krutílek is an EU legislation analyst and the editor-in-chief of Revue Politika. He graduated from the
Faculty of Social Studies, Masaryk University, with a master's degree in political science, international
relations, and European studies.

New Direction assumes no responsibility for facts or opinions expressed in this publication or their
subsequent use. Sole responsibility lies on the author of this publication.

This publication received funding from the European Parliament.

March 2012

Printed in Belgium

ISBN: 978-2-87555-000-2

Publisher and copyright holder:

New Direction – The Foundation for European Reform
Rue d'Arlon 40, 1000 Brussels, Belgium
Phone: +32 2 808 7847, Email: contact@newdirectionfoundation.org
www.newdirectionfoundation.org
Table of Contents

Table of Contents ...........................................................................................................................3
1. List of Abbreviations...................................................................................................................4
2. Executive Summary ....................................................................................................................5
3. Introduction ...............................................................................................................................7
4. EU Initiatives Submitted in Reaction to the Crisis and Their Classification ................................. 11
5. EU Initiatives Submitted in Reaction to the Crisis through the Prism of the Political Cycle and
Good Governance Model ............................................................................................................. 21
   5.1. General Remarks ............................................................................................................... 21
       5.1.1. The Problems of Co-decision....................................................................................... 21
       5.1.2. The Problem of Implementation ................................................................................. 24
       5.1.3. The Problems of Permanent Changes in the Rules of the Game .................................. 27
   5.2. The Political Cycle and Good Governance .......................................................................... 32
6. Conclusions and Recommendations ......................................................................................... 35
Appendices .................................................................................................................................. 37
Lists ............................................................................................................................................. 47
   List of boxes ............................................................................................................................. 47
   List of graphs............................................................................................................................ 47
   List of case studies ................................................................................................................... 47
Sources ........................................................................................................................................ 48
   Books, Journals, Electronic Sources .......................................................................................... 48
   Documents .............................................................................................................................. 50
   Websites .................................................................................................................................. 62
Endnotes ..................................................................................................................................... 63
1. List of Abbreviations

CESR    Committee of European Securities Regulators

EBA     European Banking Authority

ECB     European Central Bank

EFSF    European Financial Stability Facility

EFSM    European Financial Stabilisation Mechanism

EC      European Community

ESM     European Stability Mechanism

ESMA    European Securities and Markets Authority

ESRB    European Systemic Risk Board

EU      European Union

IAS     International Accounting Standard

IFRIC   International Financial Reporting Interpretations Committee

IFRS    International Financial Reporting Standard

OTC     over-the-counter

                                                                      NEW DIRECTION│Page 4
2. Executive Summary

In reaction to the financial, economic and debt crises, the EU has mainly worked as a law machine,
producing an unprecedented number of new laws and regulations, in an attempt to demonstrate its ability
to act quickly and decisively to prevent future downturns.

In the last three years the EU drafted 68 legislative texts. This study summarises and analyses all of the
relevant legislative steps taken by the EU institutions between September 2008 and December 2011.

The conclusions of this research demonstrate that the quality of new legislation is often questionable and
their impact – on the European economy, on competitiveness, and on the stability of the banking sector –
could in some cases be more harmful than beneficial.

The proposed laws were often not properly assessed and examined by all relevant actors. Consequently,
some laws have been so poorly drafted that they are already being revised or criticised by other
international bodies. Meanwhile, the EU has put aside most of its earlier commitments to the principles of
openness, accountability and effectiveness. Only 18 public consultations were opened and only 19
proposals had impact assessments.

This study therefore argues that any legislative action – especially at the level of the EU – must have its
“internal” logic and has to be thoroughly scrutinised. Otherwise, it contradicts the principles of good
governance which were set out in the Commission’s 2001 White Paper on European Governance. This
contradiction makes the EU an easy target for criticism that it is a mainly bureaucratic, inefficient and
closed-up institution, capable of delivering rapid outcomes but not properly considering their very
substance and impact. As a consequence, EU member states – on whose ability to deliver any solutions the
EU is directly dependent – have a tendency to follow their own path, out of tune with the EU.

The text is also extensively accompanied by economic “case studies” of selected legislative proposals, for
example the Regulation on Credit Rating Agencies, Financial Oversight, Capital Requirements Regulation,
Revision of the Stability and Growth Pact, Regulation on Short Selling and Credit Default Swaps. For
example in the case of the Implementation of Basel III regulations – which sets new harmonised
requirements for capital standards – the study concludes that this may reduce the soundness of banks
rather than improve it. In terms of good governance, the EU's response to the economic crisis is found to be
dismal.

The Main Findings of the Study Are:

           The powers of the central mechanism of the EU have increased at the expense of the Member
           States.
           The subsidiarity principle as a legislative brake on the EU's development does not work.
           Between September 2008 and December 2011 (i.e. during a period of 40 months), the EU
           drafted 68 legislative texts comprising of 2575 pages – an unprecedented amount of laws
           proposed under a single heading of “crisis”. (The texts implementing the Basel III agreement into
           the EU legislation comprised 691 pages!)
           By the end of December 2011, 52 of them had been adopted and made fully valid.

                                                                                NEW DIRECTION│Page 5
Apart from 30 regulations adopting international accounting standards, three fifths of the
          remaining proposals have been designed to put a completely new, formerly non-existent
          regulation into practice.
          Most of the proposals have been endorsed by the European Commission alone, or by using a
          shortened version of the Council and European Parliament co-decision procedure.
          Most of the proposals have been designed as directly-applicable texts (regulations, decisions),
          which do not allow the member states to implement them according to those States’ specific
          conditions.
          The 68 proposals have been accompanied by only 19 descriptive (i.e. non-analytical) impact
          assessments and 18 public consultations, which lasted only 50 days on average. A crucial
          overhaul of the Stability and Growth Pact, for example, came with no impact assessment and/or
          public consultation.
          The aforementioned approach has in most cases led to poorly-drafted legislative texts; some of
          them have already had to be revised – for example, the case of proposals on deposit guarantee
          schemes or on credit rating agencies (see more in “Case Studies”).

Recommendations:

To guarantee that the member states (on whose ability to deliver any solutions the EU is directly
dependent) comply, the EU and its institutions should:

          enforce the rules which have already been put in force;
          seek legislative solutions only in situations where there is no other option (see a firstly non-
          binding but well-functioning “European Semester”);
          accompany every legislative proposal with (a) an adequately long public consultation and (b) a
          non-descriptive (i.e. analytical) impact assessment;
          adopt the proposals in a regime of delegation (i.e. by Commission), or by using a shortened
          version of a decision-making procedure – only in situations where there is no other option;
          prefer directives which (a) are only binding with regards to the result which is to be achieved
          and (b) have a sufficiently long implementation period.

                                                                              NEW DIRECTION│Page 6
3. Introduction

The financial and economic crisis has had – and undoubtedly continues to have – fundamental economic,
political, and social consequences. It has gradually transformed into a far-reaching crisis for the common
European currency project of the Euro, and according to some opinions even into a crisis of European
                1
identity as such .

At the European Union (EU) level, the increase of legislative proposals which have been adopted via the
ordinary legislative process has become one of the most common reactions to this development (cf.
European Commission 2009, pp. 55-86). This has aimed at the future elimination of the broadest range of
negative effects which the crisis has “revealed.” It is also important to note that the first thoughts of
changing (to a limited extent) the secondary legislation ex definitio were soon accompanied by motions for
insignificant changes to the primary legislation (these are changes which redefine the legal framework of
the EU itself; cf. Craig & De Búrca 2008, p. 82).

This text summarises all relevant EU legislative steps taken from September 2008 (after the fall of the
American bank Lehman Brothers) until the end of December 2011, and tries to evaluate them from a
diachronic perspective. Taking into account the fact that not all ideas outlined by the Commission have yet
been transformed into specific proposals (and of those that have, not all have been approved and
implemented in member states), the analysis does not reflect the content of the steps taken (although it
does not avoid it, as the text below will show) but focuses on the procedural side: that is, it looks at the
methods chosen, the chronology of events, and with the speed and precision with which the EU institutions
(primarily the Commission, the Council and the European Parliament) have dealt with the new agenda.

The key argument for this approach is the fact that the EU is anything but finished in its current position
of submitting its initiatives in reaction to the crisis,2 and any attempt of a definite meritorious evaluation
of existing steps would be methodologically difficult to vindicate; any potential future initiative could
qualitatively change its overall substance one way or the other.3

On the other hand, it is indisputable that the content of the issue is negligible; the chosen argumentation
could not be regarded as complete without its inclusion, and the analysis would have significantly lower
predicative value. Therefore, the text is accompanied, in an extensive way, by meritorious economic “case
studies” of select drafted proposals, which focus on their potential to truly influence the functioning of
those economic segments (the whole EU or individual member states) to which those proposals (motions)
refer.

In terms of the types of researched documents, the analysis focuses primarily on legislative proposals
whose outcomes are (should be) standard secondary legislation adopted in the interaction of the
Commission, the Council, and the European Parliament (that is, within a consultation or a co-decision
procedure/ordinary legislative procedure; cf. Craig & De Búrca 2008, p. 113).4 The reason is that at the EU
level, these types of documents most often occur in connection to the EU’s reaction to the crisis. It is also
important to say that draft regulations, decisions, and directives (the most used secondary legislation; cf.
Craig & De Búrca 2008, pp. 83-86)5 are, in the context of the EU legislation, the easiest to monitor, the
easiest to influence, and, with the impact of their final version, the most predictable. This type of legislation
is identifiable in contrast with:

                                                                                    NEW DIRECTION│Page 7
A. expected – but not yet concrete – changes to the primary law (no other relevant idea,6 with the
          exception of the establishment of the European Stability Mechanism for the period after 2013,
                                                                                              7
          has gained a form of a concrete proposal which would directly impact the actors);
       B. legislative activity of institutions other than the Commission, the Council, and the European
          Parliament (e.g. the European Central Bank is empowered, on the grounds of the Protocol on
          the Statute of the European System of Central Banks and of the European Central Bank
          [attached to the EU Treaty and the Treaty on the Functioning of the European Union] to adopt
          its own binding decisions in a regime of delegation which has a form of secondary law, whereas
          the chance to directly influence its adoption is minimal; cf. Article 129(4) of the Treaty on the
          Functioning of the European Union);8
       C. initiatives which are by definition outside of the EU framework (a typical example is the creation
          of the European Financial Stability Facility (EFSF) according to international law policy; cf. Evans
          2010, pp. 115–121).

Of course, those other types are not less important than secondary legislation; many times, the opposite is
the case – as the case studies show. However, an analysis of these steps does not represent, from the
formal point of view, a meaningful clue when presenting relevant recommendations as to how the EU and
its institutions should act in a similar “critical” situation.9

A political science approach called policy analysis, or a concept of policy such as the political cycle, can be
the clue (cf. Schubert 1991, p. 70). A comparison of “ideal” phases of the political cycle with its practical
realisation (cf. Box 1) not only allows the formulation of concrete recommendations but, at the same time
allows for the insertion of a specific political sector (here it is the EU level, but can include all its dimensions
– polity, policy, and politics; cf. Fiala 1995, pp. 132–133) into a context of a good governance concept. The
concept is an inseparable part of most debates that aim to explicitly or implicitly justify the need for further
integration and deepening of the EU (cf. Laeken Declaration on the Future of the European Union 2001).
This can lead to the conclusion that if the political cycle is not realised adequately in the EU, it is more
than probable that the EU does not fulfil the principle of good governance (see Box 2), and offers its
opponents a strong argument as to why the process of integration and deepening of the EU should not
continue at this speed – not to mention such direct consequences as existing unresolved problems, the
unintended impact of legislative measures, the bureaucratisation of politics, ineffective allocation of
resources etc. (cf. Hix 2008; Scharpf 2010).

Box 1: The Political Cycle and the EU

The core of the political cycle is the presumption that politics is a repetitive, internally logical process of
“‘approaching’ the lastly chosen solution” (cf. Fiala & Schubert 2000, p. 75). It uses the following terms:

       A.   initiation;
       B.   estimation;
       C.   selection;
       D.   implementation;
       E.   evaluation;
       F.   termination (cf. Schubert 1991, p. 70; Blum & Schubert 2009, pp. 101–140).

The initiation phase is defined by the detection of a problem which for some reason must be solved
politically. During the estimation phase, the problem is structured, and the costs and benefits of its solution
are calculated. In the selection phase, a decision is made about who will solve the problem, how they will

                                                                                      NEW DIRECTION│Page 8
do it, and what resources they will use. After this, the decision is implemented; ideally, during or after
implementation, an administrative, political, or research evaluation should be in progress. If the previously
identified problem is proven to be solved, the political cycle is terminated. If not, a new selection,
implementation, or evaluation will start.

This division of phases is only didactic – phases can overlap, and do not always need to occur at all. The
most important thing is that time plays a fundamental role in the political cycle. It is the time dimension
which not only shows the necessity of the sequence of realisation for any given policy (i.e. a political
solution to the problem), but also implicitly supposes that each phase will be adequately long, to consider
the merit of the problem. In other words, if the political cycle is accomplished only formally (no matter the
content), its repetition is probable because the previous problem will not be solved (cf. Fiala 2010b, pp. 32–
37, 107–116).

                                                                                               10
It is difficult to determine the initiative phase in the EU as well as in other political systems (cf. Wallace,
Pollack & Young 2010, pp. 46–48). On the other hand, it is usually not important who came up with the
problem. It can be discovered by a person, region, an interest group, a member state, or an EU institution; it
can derive from a decision of the European Court of Justice, from a revision clause of currently valid
secondary legislation, or (newly) from citizens’ initiative (created by Article 11 of the EU Treaty revised by
the Treaty of Lisbon and Article 24 of the Treaty on the Functioning of the European Union). The crucial
estimation phase can be identified at the EU level (compared to the initiation phase) with several specific
activities (not all must necessarily happen). This could be, for example, the publication of a green or white
paper, accompanied by public consultations; the publication of an expert study or an impact assessment; an
adoption of a recommendation or an opinion, etc. The selection phase is in fact the relevant legislation
process which begins with the submission of a legislative proposal and ends with its publication in the
Official Journal of the EU. A norm is then implemented during the implementation phase (by the EU itself or
the member states and the states´ organs). The evaluation and termination phases usually contain new
selection, implementation, and evaluation, etc.

Box 2: Good Governance and the EU

The concept of good governance is generally considered problematic because of its unclear definition (cf.
Börzel, Pamuk & Stahn 2008, pp. 5–8). If it is disengaged from the connotations with development policy
(see Dolzer, Herdegen & Vogel 2007), it points to a proper and an effective functioning of an administrative
and regulatory framework. It is used in this way regarding the administration of the EU (cf. Dolzer 2004, p.
535). In 2001, the Commission published the White Paper European Governance (cf. European Commission
2001; Curtin & Wessel 2005, pp. 3–20) which states the following principles of good governance:

       A.   openness;
       B.   participation;
       C.   accountability;
       D.   effectiveness;
       E.   coherence;
       F.   proportionality;
       G.   subsidiarity.

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The first five principles do not have direct support from the primary law (there is only a proportionality and
subsidiarity principle)11; however, the White Paper itself specifies clearly as to what results should the
accomplishment of these principles lead (and by which qualitative criteria generally evaluate the inner
functions of the EU):

       A.   stronger involvement by local and regional governments in the EU legislative process;
       B.   the consideration of local and regional conditions when implementing EU legislation;
       C.   the initiation of minimal standards for EU public consultations;
       D.   the application of adequate political tools;
       E.   the simplification of the EU law and its effective enforcement (cf. European Commission 2001,
            pp. 4–5).

This analysis is divided into three basic parts. The first chapter focuses on listing and giving a basic
classification of all relevant “crisis” initiatives of the EU. The second chapter attempts to evaluate these
initiatives through the concept of the political cycle and the good governance principle. The
aforementioned economic “case studies” (of proposals chosen by the EU) form an indispensable part of the
second chapter. The final chapter, continuing directly from the discussion preceding it, aims at formulating
specific recommendations which can be implemented at the EU institutional level.

                                                                                NEW DIRECTION│Page 10
4. EU Initiatives Submitted in Reaction to the Crisis and
Their Classification

The EU responded almost immediately to the crisis, which according to many started with the collapse of
the American bank Lehman Brothers in September 2008. By October 2008, the Commission submitted first
initiatives and started initial discussions within the EU, at the bilateral level or in international for a (e.g. G
20). If we omit non-binding legislation at the EU level, the most important texts from September 2008 until
December 2011 are shown below in chronological order.

Box 3: EU Legislative Initiatives Submitted in Reaction to the Crisis

       1.  Proposal for a Directive of the European Parliament and of the Council amending Directives
           2006/48/EC and 2006/49/EC as regards banks affiliated to central institutions, certain own funds
           items, large exposures, supervisory arrangements, and crisis management (COM(2008)602)
       2. Commission Regulation (EC) No 1004/2008 of 15 October 2008 amending Regulation (EC) No
           1725/2003 adopting certain international accounting standards in accordance with Regulation
           (EC) No 1606/2002 of the European Parliament and of the Council as regards International
           Accounting Standard (IAS) 39 and International Financial Reporting Standard (IFRS) 7
       3. Proposal for a Directive of the European Parliament and of the Council amending Directive
           94/19/EC on Deposit Guarantee Schemes as regards the coverage level and the pay-out delay
           (COM(2008)661)
       4. Commission Regulation (EC) No 1126/2008 of 3 November 2008 adopting certain international
           accounting standards in accordance with Regulation (EC) No 1606/2002 of the European
           Parliament and of the Council
       5. Proposal for a Regulation of the European Parliament and of the Council on Credit Rating
           Agencies (COM(2008)704)
       6. Commission Regulation (EC) No 1260/2008 of 10 December 2008 amending Regulation (EC) No
           1126/2008 adopting certain international accounting standards in accordance with Regulation
           (EC) No 1606/2002 of the European Parliament and of the Council as regards International
           Accounting Standard (IAS) 23
       7. Commission Regulation (EC) NO 1261/2008 of 16 December 2008 amending Regulation (EC) No
           1126/2008 adopting certain international accounting standards in accordance with Regulation
           (EC) No 1606/2002 of the European Parliament and of the Council as regards International
           Financial Reporting Standard (IFRS) 2
       8. Commission Regulation (EC) No 1262/2008 of 16 December 2008 amending Regulation (EC) No
           1126/2008 adopting certain international accounting standards in accordance with Regulation
           (EC) No 1606/2002 of the European Parliament and of the Council as regards International
           Financial Reporting Interpretations Committee’s (IFRIC) Interpretation 13
       9. Commission Regulation (EC) No 1263/2008 of 16 December 2008 amending Regulation (EC) No
           1126/2008 adopting certain international accounting standards in accordance with Regulation
           (EC) No 1606/2002 of the European Parliament and of the Council as regards International
           Financial Reporting Interpretation Committee's (IFRIC) Interpretation 14
       10. Commission Regulation (EC) No 1274/2008 of 17 December 2008 amending Regulation (EC) No
           1126/2008 adopting certain international accounting standards in accordance with Regulation
           (EC) No 1606/2002 of the European Parliament and of the Council as regards International
           Accounting Standard (IAS) 1

                                                                                    NEW DIRECTION│Page 11
11. Commission Regulation (EC) No 53/2009 of 21 January 2009 amending Regulation (EC) No
    1126/2008 adopting certain international accounting standards in accordance with Regulation
    (EC) No 1606/2002 of the European Parliament and of the Council as regards International
    Accounting Standard (IAS) 32 and IAS 1
12. Commission Regulation (EC) No 69/2009 of 23 January 2009 amending Regulation (EC) No
    1126/2008 adopting certain international accounting standards in accordance with Regulation
    (EC) No 1606/2002 of the European Parliament and of the Council as regards amendments to
    International Financial Reporting Standard (IFRS) 1 and International Accounting Standard (IAS)
    27
13. Commission Regulation (EC) No 70/2009 of 23 January 2009 amending Regulation (EC) No
    1126/2008 adopting certain international accounting standards in accordance with Regulation
    (EC) No 1606/2002 of the European Parliament and of the Council as regards Improvements to
    International Financial Reporting Standards (IFRSs)
14. Commission Decision of 23 January 2009 establishing the Committee of European Securities
    Regulators (2009/77/ES)
15. Commission Decision of 23 January 2009 establishing the Committee of European Banking
    Supervisors (2009/78/ES)
16. Commission Decision of 23 January 2009 establishing the Committee of European Insurance and
    Occupational Pensions Supervisors (2009/79/ES)
17. Commission Regulation (EC) No 254/2009 of 25 March 2009 amending Regulation (EC) No
    1126/2008 adopting certain international accounting standards in accordance with Regulation
    (EC) No 1606/2002 of the European Parliament and of the Council as regards International
    Financial Reporting Interpretations Committee's (IFRIC) Interpretation 12
18. Proposal for a Directive of the European Parliament and of the Council on Alternative
    Investment Fund Managers and amending Directives 2004/39/EC and 2009/…/EC
    (COM(2009)207)
19. Commission Regulation (EC) No 460/2009 of 4 June 2009 amending Regulation (EC) No
    1126/2008 adopting certain international accounting standards in accordance with Regulation
    (EC) No 1606/2002 of the European Parliament and of the Council as regards International
    Financial Reporting Interpretations Committee’s (IFRIC) Interpretation 16
20. Commission Regulation (EC) No 494/2009 of 3 June 2009 amending Regulation (EC) No
    1126/2008 adopting certain international accounting standards in accordance with Regulation
    (EC) No 1606/2002 of the European Parliament and of the Council as regards International
    Accounting Standard (IAS) 27
21. Commission Regulation (EC) No 495/2009 of 3 June 2009 amending Regulation (EC) No
    1126/2008 adopting certain international accounting standards in accordance with Regulation
    (EC) No 1606/2002 of the European Parliament and of the Council as regards International
    Financial Reporting Standard (IFRS) 3
22. Proposal for a Decision of the European Parliament and of the Council establishing a European
    Microfinance Facility for Employment and Social Inclusion (Progress Microfinance Facility)
    (COM(2009)333)
23. Proposal for a Directive of the European Parliament and of the Council amending Directives
    2006/48/EC and 2006/49/EC as regards capital requirements for the trading book and for re-
    securitisations, and the supervisory review of remuneration policies (COM(2009)362)
24. Commission Regulation (EC) No 636/2009 of 22 July 2009 amending Regulation (EC) No
    1126/2008 adopting certain international accounting standards in accordance with Regulation
    (EC) No 1606/2002 of the European Parliament and of the Council as regards International
    Financial Reporting Interpretations Committee’s (IFRIC) Interpretation 15

                                                                      NEW DIRECTION│Page 12
25. Commission Regulation (EC) No 824/2009 of 9 September 2009 amending Regulation (EC) No
    1126/2008 adopting certain international accounting standards in accordance with Regulation
    (EC) No 1606/2002 of the European Parliament and of the Council as regards International
    Accounting Standard (IAS) 39 and International Financial Reporting Standard (IFRS) 7
26. Commission Regulation (EC) No 839/2009 of 15 September 2009 amending Regulation (EC) No
    1126/2008 adopting certain international accounting standards in accordance with Regulation
    (EC) No 1606/2002 of the European Parliament and of the Council as regards International
    Accounting Standard (IAS) 39
27. Proposal for a Regulation of the European Parliament and of the Council on Community macro
    prudential oversight of the financial system and establishing a European Systemic Risk Board
    (COM(2009)499)
28. Proposal for a Council Decision entrusting the European Central Bank with specific tasks
    concerning the functioning of the European Systemic Risk Board (COM(2009)500)
29. Proposal for a Regulation of the European Parliament and of the Council establishing a European
    Banking Authority (COM(2009)501)
30. Proposal for a Regulation of the European Parliament and of the Council establishing a European
    Insurance and Occupational Pensions Authority (COM(2009)502)
31. Proposal for a Regulation of the European Parliament and of the Council establishing a European
    Securities and Markets Authority (COM(2009)503)
32. Proposal for a Directive of the European Parliament and of the Council amending Directives
    1998/26/EC, 2002/87/EC, 2003/6/EC, 2003/41/EC, 2003/71/EC, 2004/39/EC, 2004/109/EC,
    2005/60/EC, 2006/48/EC, 2006/49/EC, and 2009/65/EC in respect of the powers of the
    European Banking Authority, the European Insurance and Occupational Pensions Authority and
    the European Securities and Markets Authority (COM(2009)576)12
33. Commission Regulation (EC) No 1136/2009 of 25 November 2009 amending Regulation (EC) No
    1126/2008 adopting certain international accounting standards in accordance with Regulation
    (EC) No 1606/2002 of the European Parliament and of the Council as regards International
    Financial Reporting Standard (IFRS) 1
34. Commission Regulation (EC) No 1142/2009 of 26 November 2009 amending Regulation (EC) No
    1126/2008 adopting certain international accounting standards in accordance with Regulation
    (EC) No 1606/2002 of the European Parliament and of the Council as regards International
    Financial Reporting Interpretations Committee's (IFRIC) Interpretation 17
35. Commission Regulation (EC) No 1164/2009 of 27 November 2009 amending Regulation (EC) No
    1126/2008 adopting certain international accounting standards in accordance with Regulation
    (EC) No 1606/2002 of the European Parliament and of the Council as regards International
    Financial Reporting Interpretations Committee's (IFRIC) Interpretation 18
36. Commission Regulation (EC) No 1165/2009 of 27 November 2009 amending Regulation (EC) No
    1126/2008 adopting certain international accounting standards in accordance with Regulation
    (EC) No 1606/2002 of the European Parliament and of the Council as regards International
    Financial Reporting Standard (IFRS) 4 and IFRS 7
37. Commission Regulation (EC) No 1171/2009 of 30 November 2009 amending Regulation (EC) No
    1126/2008 adopting certain international accounting standards in accordance with Regulation
    (EC) No 1606/2002 of the European Parliament and of the Council as regards International
    Financial Reporting Interpretations Committee's (IFRIC) Interpretation 9 and International
    Accounting Standard (IAS)

                                                                      NEW DIRECTION│Page 13
38. Commission Regulation (EU) No 1293/2009 of 23 December 2009 amending Regulation (EC) No
    1126/2008 adopting certain international accounting standards in accordance with Regulation
    (EC) No 1606/2002 of the European Parliament and of the Council as regards International
    Accounting Standard (IAS) 32
39. Commission Regulation (EU) No 243/2010 of 23 March 2010 amending Regulation (EC) No
    1126/2008 adopting certain international accounting standards in accordance with Regulation
    (EC) No 1606/2002 of the European Parliament and of the Council as regards Improvements to
    International Financial Reporting Standards (IFRSs)
40. Commission Regulation (EU) No 244/2010 of 23 March 2010 amending Regulation (EC) No
    1126/2008 adopting certain international accounting standards in accordance with Regulation
    (EC) No 1606/2002 of the European Parliament and of the Council as regards International
    Financial Reporting Standard (IFRS) 2
41. Council Regulation (EU) No 407/2010 of 11 May 2010 establishing a European financial
    stabilisation mechanism
42. Proposal for a Regulation of the European Parliament and of the Council on amending
    Regulation (EC) No 1060/2009 on credit rating agencies (COM(2010)289)
43. Commission Regulation (EU) No 550/2010 of 23 June 2010 amending Regulation (EC) No
    1126/2008 adopting certain international accounting standards in accordance with Regulation
    (EC) No 1606/2002 of the European Parliament and of the Council as regards International
    Financial Reporting Standard (IFRS) 1
44. Commission Regulation (EU) No 574/2010 of 30 June 2010 amending Regulation (EC) No
    1126/2008 adopting certain international accounting standards in accordance with Regulation
    (EC) No 1606/2002 of the European Parliament and of the Council as regards International
    Financial Reporting Standard (IFRS) 1 and IFRS 7
45. Proposal for a Directive …/…/EU of the European Parliament and of the Council on Deposit
    Guarantee Schemes (COM(2010)368)
46. Proposal for a Directive of the European Parliament and of the Council amending Directive
    97/9/EC of the European Parliament and of the Council on investor-compensation schemes
    (COM(2010)37113
47. Commission Regulation (EU) No 632/2010 of 19 July 2010 amending Regulation (EC) No
    1126/2008 adopting certain international accounting standards in accordance with Regulation
    (EC) No 1606/2002 of the European Parliament and of the Council as regards International
    Accounting Standard (IAS) 24 and International Financial Reporting Standard (IFRS) 8
48. Commission Regulation (EU) No 633/2010 of 19 July 2010 amending Regulation (EC) No
    1126/2008 adopting certain international accounting standards in accordance with Regulation
    (EC) No 1606/2002 of the European Parliament and of the Council as regards International
    Financial Reporting Interpretations Committee's (IFRIC) Interpretation 14
49. Commission Regulation (EU) No 662/2010 of 23 July 2010 amending Regulation (EC) No
    1126/2008 adopting certain international accounting standards in accordance with Regulation
    (EC) No 1606/2002 of the European Parliament and of the Council as regards International
    Financial Reporting Interpretations Committee's (IFRIC) Interpretation 19 and International
    Financial Reporting Standard (IFRS) 1
50. Proposal for a Regulation of the European Parliament and of the Council on Short Selling and
    certain aspects of Credit Default Swaps (COM(2010)482)
51. Proposal for a Regulation of the European Parliament and of the Council on OTC derivatives,
    central counterparties and trade repositories (COM(2010)484)

                                                                    NEW DIRECTION│Page 14
52. EFSF Framework Agreement between Kingdom of Belgium, Federal Republic of Germany,
    Ireland, Kingdom of Spain, French Republic, Italian Republic, Republic of Cyprus, Grand Duchy of
    Luxembourg, Republic of Malta, Kingdom of the Netherlands, Republic of Austria, Portuguese
    Republic, Republic of Slovenia, Slovak Republic, Republic of Finland, Hellenic Republic and
    European Financial Stability Facility, 7 June 2010
53. Proposal for a Council Regulation (EU) No …/… amending Regulation (EC) No 1467/97 on
    speeding up and clarifying the implementation of the excessive deficit procedure
    (COM(2010)522)
54. Proposal for a Council Directive on requirements for budgetary frameworks of the member
    states (COM(2010)523)
55. Proposal for a Regulation of the European Parliament and of the Council on the effective
    enforcement of budgetary surveillance in the euro area (COM(2010)524)
56. Proposal for a Regulation of the European Parliament and of the Council on enforcement
    measures to correct excessive macroeconomic imbalances in the euro area (COM(2010)525)
57. Proposal for a Regulation of the European Parliament and of the Council amending Regulation
    (EC) No 1466/97 on the strengthening of the surveillance of budgetary positions and the
    surveillance and coordination of economic policies (COM(2010)526)
58. Proposal for a Regulation of the European Parliament and of the Council on the prevention and
    correction of macroeconomic imbalances (COM(2010)527)14
59. Decision of the European Central Bank of 13 December 2010 on the increase of the European
    Central Bank’s capital (ECB/2010/26)
60. Draft European Council Decision of … amending Article 136 of the Treaty on the Functioning of
    the European Union with regard to a stability mechanism for member states whose currency is
    the euro 15
61. Proposal for a Regulation of the European parliament and of the Council on prudential
    requirements for credit institutions and investment firms (COM(2011)452)
62. Proposal for a Directive of the European parliament and of the Council on the access to the
    activity of credit institutions and the prudential supervision of credit institutions and investment
    firms and amending Directive 2002/87/EC of the European Parliament and of the Council on the
    supplementary supervision of credit institutions, insurance undertakings and investment firms in
    a financial conglomerate (COM(2011)453)
63. Proposal for a Directive of the European Parliament and of the Council amending Directive
    2009/65/EC on the coordination of laws, regulations and administrative provisions relating to
    undertakings of collective investment in transferable securities (UCITS) and Directive
    2011/61/EU on Alternative Investment Funds Managers in respect of the excessive reliance on
    credit ratings (COM(2011)746)
64. Proposal for a Regulation of the European Parliament and of the Council amending Regulation
    (EC) No 1060/2009 on credit rating agencies (COM(2011)747)
65. Proposal for a Directive of the European Parliament and of the Council amending Directive
    2006/43/EC on statutory audits of annual accounts and consolidated accounts (COM(2011)778)
66. Proposal for a Regulation of the European Parliament and of the Council on specific
    requirements regarding statutory audit of public-interest entities (COM(2011)779)
67. Proposal for a Regulation of the European Parliament and of the Council on the strengthening of
    economic and budgetary surveillance of Member States experiencing or threatened with serious
    difficulties with respect to their financial stability in the euro area (COM(2011)819)
68. Proposal for a Regulation of the European Parliament and of the Council on common provisions
    for monitoring and assessing draft budgetary plans and ensuring the correction of excessive
    deficit of the Member States in the euro area (COM(2011)821)

                                                                          NEW DIRECTION│Page 15
Certain non-legislative initiatives, which could (and still can) bring about fundamental political discussions
were specifically excluded from this list. These include:

Box 4: EU Non-legislative Initiatives Submitted in Reaction to the Crisis

       A. The High-Level Group on Financial Supervision in the EU chaired by Jacques de Larosière. Report,
          Brussels, 25 February 2009
       B. Communication from the Commission to the European Parliament, the European Council, the
          council, the European Central Bank, the economic and social committee and the Committee of
          the Regions – Reinforcing economic policy coordination (COM(2010)250)
       C. Communication from the Commission to the European Parliament, the Council, the European
          Economic and Social Committee and the European Central Bank – Bank Resolution Funds
          (COM(2010)254)
       D. Communication from the Commission to the European Parliament, the Council, the European
          Economic and Social Committee and the European Central Bank – Regulating financial services
          for sustainable growth (COM(2010)301)
       E. Report of the Task Force (of the president of the European Council Herman Van Rompuy –
          author’s note) to the European Council, Brussels, 21 October 2010
       F. Communication from the Commission to the European Parliament, the Council, the European
          Economic and Social Committee and the Committee of the Regions. Annual Growth Survey:
          advancing the EU's comprehensive response to the crisis (COM(2011)11)
       G. Communication from the Commission. Annual Growth Survey 2012 (COM(2011)815)
       H. Green paper on the feasibility of introducing Stability Bonds (COM(2011)818)

Even a brief glance at the lists in Box 3 and Box 4 makes it clear that, from the quantitative point of view at
least, the EU took an unprecedented step between September 2008 and December 2011. Within 40
months it submitted 68 legislative texts, comprising 2575 pages, under the subject of “crisis” alone.1652 of
these proposals were already adopted17 and fully valid (that is, published in the Official Journal of the EU)
by the end of December 2011. If we ignore the particularities of 30 proposals which concerned the
adoption of international accounting standards18 at the EU level, three fifths of the remaining proposals
were designed to establish completely new, previously not applied regulations (which do not originate
from, nor directly modify, another secondary law). It is interesting that the Treaty of Lisbon has played only
a minor role in this regard, although it has defined a new framework for primary law since December 2009.
Not only did it enter into force in the middle of the period in question, but all the basic legal elements of
new proposals had already existed under the Treaty of Nice – that is, in the previous versions of primary law
(cf. Graph 1).

                                                                                 NEW DIRECTION│Page 16
Graph 1: Legal Grounds for EU Legislative Proposals Submitted in Reaction to the Crisis1

14

12

10

8

6

4

2

0
     Approximation    Right of   Economic policyEconomic, socialMonetary policy             Services
        of laws    establishment                 and territorial
                                                   cohesion

 The fact is that the majority of proposals submitted were subject to the co-decision procedure (ordinary
 legislative procedure), or to a consultation. Only rarely were these proposals factually decided solely by the
 Commission, the Council, the European Parliament, the European Central Bank (in the regime of delegation)
 or, as in the case of EFSF, outside the EU framework (it is important to consider the special case of the 30
 proposals which involved the adoption of international accounting standards at the EU level, cf. Graph 2).

 1
   With the exception of the proposal COM(2010)523, which is to be adopted by the Council without the
 involvement of the European Parliament, the graph takes into consideration only those legislative proposals
 which are intended to be adopted by a consultation or co-decision procedure (ordinary legislative
 procedure).
                                                                                 NEW DIRECTION│Page 17
Graph 2: Procedure of Accepting Legislative Proposals Submitted by the EU in Reaction to the Crisis 2

35

30

25

20

15

10

    5

    0
         Codecision (ordinary          Other                 Consultation         Regulations adopting
        legislative procedure)                                                  international accounting
                                                                                standards at the level of
                                                                                         the EU

As a result of this, it is not surprising that the outcomes of the above-mentioned legislative processes have
generally been regulations and directives of the European Parliament and the Council, and less often other
norms (cf. Graph 3).

2
  Category “Others” involves all legislative proposals which were (or are being) decided de facto by the
Commission, the Council, the European Parliament, the European Central Bank, or outside the EU
framework.
                                                                                NEW DIRECTION│Page 18
Graph 3: Legislative Proposals Submitted by the EU in Reaction to the Crisis according to Type of
Anticipated Final Norm (by share of EU institutions)3

18

16

14

12

10

    8

    6

    4

    2

    0
        Regulation   Directive of Commission Council Decision of Decision of European     Council    Council
           of the        the       Decision Regulation     the        the      Council   Directive   Decision
         European     European                          European European Decision
        Parliament   Parliament                        Parliament Central Bank
        and of the   and of the                        and of the
          Council      Council                           Council

On the other hand, one is taken by surprise by the relatively high usage of norms that are directly applicable
and effective (regulations, decisions), and thus do not allow, unlike directives, implementation according to
local (regional, national) conditions, or in a gradual way (cf. Graph 4).

3
  Graph 3 does not consider the 30 proposals of the Commission which adopted international accounting
standards at the EU level.
                                                                                  NEW DIRECTION│Page 19
Graph 4: Legislative Proposals Submitted by the EU in Reaction to the Crisis according to Type of
Anticipated Final Norm (regardless of the share of the EU institutions)4

    20

    18

    16

    14

    12

    10

    8

    6

    4

    2

    0
                 Regulations                       Directives                       Decisions

4
  Graph 4 does not consider the 30 proposals of the Commission which adopted international accounting
standards at the EU level.
                                                                               NEW DIRECTION│Page 20
5. EU Initiatives Submitted in Reaction to the Crisis
through the Prism of the Political Cycle and Good
Governance Model

5.1. General Remarks
A basic classification of the EU initiatives submitted in reaction to the crisis that were mentioned in the
previous chapter offers a clear but contradictory picture. It is clear because it shows the attempts of the EU
to react to the crisis promptly and without delay; contradictory, because this reaction had or has the
potential, if not completely then significantly, to take a binding legislative form. All of the EU initiatives
mentioned above are reactive by definition, and thus one cannot expect that they will be truly able to
reverse the consequences of the crisis. They rather redefine the current legislative framework for the
future, though they are not able to predict what the future will look like.

If we omit the quantitative side of the matter (the number of submitted proposals), most of the initiatives
nominally respect a trend of the last twenty years, during which the EU’s secondary legislation has been
adopted mainly by the co-decision procedure (ordinary legislative procedure) that includes the involvement
not only of the Council, but also of the directly elected European Parliament. On the other hand:

       A. this trend is de facto used less frequently;
       B. the outcome of these legislative procedures at the EU level are not primarily norms (directives) –
          which allow a gradual transposition compliant with local (regional, national) conditions – but
          rather regulations and decisions, which go into effect immediately and unconditionally;
       C. not only is secondary legislation changing, but at the same time, the framework in which these
          changes happen (that is, primary legislation) is as well.

5.1.1. The Problems of Co-decision
The purpose of the co-decision procedure – which was introduced into primary law by the Maastricht EU
Treaty,19 – was to get the only directly elected body, the European Parliament, involved in the adoption of
EU legislation, and to strengthen the debate on the proposals. All this was done with the risk that the
process of adopting the legislation would take longer than under the previous procedure of cooperation
(Tsebelis & Garrett 1997). Nevertheless, Graph 2 clearly shows that co-decision is not the only (or even the
majority) way to bring about adoption of norms in the EU.20 Moreover, the procedure itself is defined by
                  21
the primary law, so it allows for relatively unproblematic adjustments of conditions and needs of the
institutions involved.

Other than the fact that the Council decides by a qualified majority in the co-decision, and therefore the
member states individually are not able to block an adoption of the legislation, the main point is, that no
institution is bound, by the end of the first reading in the European Parliament, by externally (in the primary
law) set deadlines. The co-decision takes place only within one reading framework. From a practical point of
view, this has two main consequences:

                                                                                 NEW DIRECTION│Page 21
A. the institutions involved follow their own rules of procedure which they revise (mainly)
          depending on changes to the primary law (cf. Benčová 2007);
       B. the institutions involved are able to significantly shorten a particular legislative process (Joint
          declaration on practical arrangements for the co-decision procedure 2007).

The second of these two consequences occurs quite often (cf. European Commission 2009b) and can be
seen in the proposals drafted in reaction to the crisis. A standard order (Commission’s proposal, first
reading of the European Parliament, first reading in the Council, second reading in both institutions,
conciliation procedure if needed, adoption of the norm and its publication in the Official Journal of the EU)
is formally used, but Members of the European Parliament often informally seek to reach a compromise
with the Council even during the first reading. They speed up drafting of particular resolutions (drafts have
taken or are taking less than 123 days on average; cf. Appendix 1). They then use these documents for
further discussions with their colleagues in the European Parliament and at the same time with the
representatives of the Council. In such a case, the outcome of the first reading in the European Parliament
will reflect, as much as possible, the outcome of the Council’s first reading and the final act can be adopted
sooner (within the first reading).

One argument for this approach is the statement that a discussion about proposals is in motion and even on
the lower institutional (“expert”) level (in committees, working groups etc.). The time which is needed for
the adoption of particular proposals (regardless of the time and form of each phase) does not differ much
from the co-decision procedures, which also include a second reading or a reconciliation procedure (cf.
European Parliament 2009; European Commission 2009b; Appendix 1). There is no guarantee that the final
norm will be of higher quality.22 This can be proved mainly by the means of regulation of rating agencies in
the EU, and partly by the strengthening of financial supervision in the EU.

CASE STUDY 1: REGULATION ON CREDIT RATING AGENCIES
A Credit Rating means an assessment of the creditworthiness of a borrower by means of points or marks.
Since such an assessment of the creditworthiness of borrowers requires the professional examination of
accounting books and of the general political and economic situation, investors often entrust the task of
this assessment to professionals – the rating agencies. Their assessment helps investors assess the degree
of risk associated with a given investment instrument. In the eyes of investors, higher risk must be
compensated for by higher promised returns. As a result of various levels of risk, there are various interest
rates on various bonds of both private companies and sovereign countries.

In November 2008, the Commission proposed the Regulation on Credit Rating Agencies (COM (2008)704)
which covered various areas of regulation, including the licensing of the agencies by the Committee of
European Securities Regulators (CESR). According to Regulation 1060/2009, a ratings agency that the EU
“dislikes” would face the threat of being deprived of its right to provide the service of rating investment
instruments. Only two years later, in June 2010, did the Commission propose an amendment of this
regulation (COM(2010)289) “in order to introduce centralised oversight of credit rating agencies operating
in the EU.” In this regulation, the Commission has taken practically all powers over ratings agencies from
the member states and gives regulatory power to the European Securities and Markets Authority (ESMA).
Its costs (€2.5 million annually) will be financed by a new tax imposed on the ratings agencies. The ESMA
also will have the power to penalise the agencies up to the level of 20% of their annual revenues. Last but
not least, in November 2011, other two relevant proposals (COM(2001)746 and (COM(2011)747) were
submitted.

                                                                                NEW DIRECTION│Page 22
The idea that rating agencies should be regulated in any way is misguided. These agencies operate in a
competitive environment. In addition, accepting their rating of risk is not mandatory for any investor. Every
investor knows that the rating agencies can assess the risk wrongly. The ultimate responsibility for
investment decisions is always borne by an investor, not a credit rating agency. Regulation of credit rating
agencies is also economically dangerous. Regulation presents the risk of abuse and the influence of ratings
from politicians and officials (cf. Utzig 2010; Opp, Opp & Harris 2011). It is possible that politicians will
consider a rating as incorrect and will push the rating agencies to more politically correct assessments of
selected borrowers. Finally, regulation also implies the risk of moral hazard (cf. Hülsmann 2006). The fact
that the credit rating is subject to political or regulatory oversight creates the impression that the rating is
somewhat “official.” This will reduce risk aversion by investors. Thus the regulation of credit rating agencies
will actually increase the risk of the occurrence of bad investment.

CASE STUDY 2: FINANCIAL OVERSIGHT
Banks and financial institutions are already among the most regulated industries in the EU. Doing business
in this field requires the obtaining of a license, high start-up capital, and is subject to supervision by
governments and central banks. Banks and financial institutions must provide regular reports to their
national authorities, which have the right to declare sequestration in the event of difficulties.

In 2009, the Commission proposed the creation of a new regulatory agency – the European Systemic Risk
Board (ESRB) (COM(2009)499, COM(2009)500). The national central banks would be subject to this agency
and they would provide “all the information needed for the fulfilment of its tasks.” The ESRB will issue
“warnings” and “recommendations” to the national authorities. The cost of the ESRB is to be borne by the
European Central Bank (i.e. it will in fact be covered by printing money).

The Commission further proposed to transform some of its existing advisory bodies into new authorities
with executive powers. The European Banking Authority (COM(2009)501) would “issue guidelines and
recommendations” and “develop technical standards” “with a view to establishing consistent, efficient, and
effective supervisory practices.” The Authority would also have the right to not only to create general
standards, but also to “adopt an individual decision addressed to a financial institution requiring the
necessary action to comply with its obligations under Community law.” Financial institutions thus basically
go from the jurisdiction of the member states to the jurisdiction of the EU. Among the newly created
agencies is the European Securities Markets Authority (COM (2009) 503). All these regulatory bodies would
restrict the activities of the national supervisory authorities in the field of financial market regulation, in
favour of centralised control by the EU.

The establishment of new regulatory bodies with imprecisely-defined powers creates room for a number
of conflicts between the new EU institutions and the national authorities. This will further contribute to
the instability of the European financial system. Creation of these regulatory bodies eliminates competition
between national models of banking supervision and poses the risk of applying a single (and thus in some
cases potentially unwanted or excessive) regulation. Given that in each country there are different banking
practices (with varying degrees of using checks, credit transactions, etc.), banks have different structures of
revenues and expenditures in each member state. So it makes sense that there are different standards and
different requirements in each country (such as mandatory minimum reserve requirements). Uniform
regulation will affect individual banks in different ways, and will therefore have different impacts on their
profits, and hence on tax revenues to national budgets.

                                                                                 NEW DIRECTION│Page 23
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