It is just over a year since the Lisbon Treaty was rejected by the Irish people. In that time, sweeping changes have affected the lives of millions of people across the world. At the core of these changes has been the transformation of the international financial system. Described as one of a kind in the century, the crisis has completely reshaped the contour of world finance.

There is little doubt that the Irish financial regulator failed at the task of ensuring that the financial system here was on sound footing. However, Ireland was not a unique case of oversight failure. Many other European states also adopted a ‘light-touch’ approach and regarded overly-stringent regulation as the antithesis of competition. Over the past three decades the most difficult task of the financial regulator has been to keep up with the changing marketplace that he or she is supposed to be regulating.

Regulation, once a tainted phrase, is now championed as the antidote to the world’s economic woes. The previous system of ‘light-touch’ regulation enabled financial institutions to take huge gambles which have left us in the current mess. The lessons of the 1998 East-Asian financial crisis were apparently not heeded. The establishment of a regulatory framework for the European financial sector is paramount but it requires input from all member states. We need far better cross-border regulation that necessitates cross-border consultation between central bankers and other government and finance officials.

Financial integration, in particular within Europe, has made such progress that a bank’s failure has repercussions not only for the taxpayers of the country where the bank is incorporated but also for those in other countries. This applies not only to banks with cross-border activities but also to those with mainly national operations that have a high exposure to the banks of other countries, in particular through the money market. Bank insolvencies can be highly contagious and spread throughout the single financial system. (*1) Much of the current crisis is down to such cross-border financial integration. The European Commission has figured that the direct fiscal costs of the current crisis in the EU” at between 2.75 and 14 percent of the bloc’s gross domestic product (GDP). This amounts to a staggering 1.8 trillion Euros. (*2)

The system whereby banks in one country were ruled by a set of rules different to those in others was simply not compatible with a system that operated worldwide. For a modern financial system to work certain regulations must be homogenised across states. The legitimacy and effectiveness of the whole financial system is at stake should this fail to take place. Failure to implement the current recommendations for pan-European financial regulation would make future recessions ever more likely.

Up until now, international financial regulation has proceeded by trial and error, regulatory innovations typically following financial shocks. (*3) The need for better regulation, especially in the financial sector, is an ongoing challenge and not one that should be a sporadic priority for governments. The stability of the financial sector is too important for the European economy for governments to be complacent. That is why the current recommendations for reform are vital. Yet they may not be implemented. ECB executive director, Lorenzo Bini Smaghi, said improvements in financial markets might remove the sense of urgency for reform and allow “nationalistic tendencies and institutional jealousies” to re-emerge. (*4)

Apart from a provision in Article 64.3 TFEU which allows the Council to place extra controls on capital flows between the EU and external states, there are no references to financial regulation in the Common Market. More importantly, however, it sets in place a decision-making dynamic that is currently hampered by delay and inertia. A more reflexive and efficient EU would be better able to respond to crises like the current economic recession. This is important if Europe is to avoid another financial meltdown

As a small, open highly globalised economy, it is in Ireland’s best interests that sound international financial oversight be put in place as soon as possible. However, for efficient regulation the domain of the regulator should be the same as the domain of the market that is regulated. None of the standard tasks of a financial regulator – authorization, the provision of information, surveillance, enforcement, and the development of policy – are currently performed in a coherent manner in international markets.

The EU is in the process of rectifying this imbalance. During a meeting of the EU Council in Brussels last month, EU leaders agreed a number of measures including the creation of a “European Systemic Risk Board” as well as two other pan-European regulatory bodies to control banks, insurers and securities markets. The goal is to improve cross-border cooperation on financial supervision. The European Council, however, stresses that decisions taken by the European Supervisory Authorities should not impinge in any way on the fiscal responsibilities of member states individual nations’ supervisors will still have the final word. (*5)

The recent De Larosiere report into future pan-European financial regulation also outlines how the organisation and supervision of financial institutions and markets in the EU will take shape. It demonstrates how to strengthen European cooperation on financial stability oversight, early warning and crisis mechanisms and how EU supervisors should cooperate globally. The Group strongly supports the view that there should be a single set of core regulatory rules and supervisory standards in the EU – and lists examples where this is not the case with the current rulebook. It recommends that a clear and transparent framework must be immediately established to manage a crisis – and that all Member States must have the same set of tools and procedures. Finally, the report emphasizes the opportunity and need for the EU to deepen its bilateral financial relations with all its major partners.

This is an opportunity for global EU leadership to seize. However, without the Lisbon Treaty in place, a unified response to a situation that affects all member states of the EU cannot be realised. There are too many voices each drowning out the other. Ensuring that the EU is able to speak with one voice on matters that affect all member states is a necessary step for recovery.

If you want to give the EU the tools to respond to today’s problems today, before they take root, Vote YES on October 2nd.

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FOOTNOTES
(*1) http://www.ft.com/cms/s/0/068622e0-5e8c-11de-91ad-00144feabdc0.html?nclick_check=1
(*2) http://ec.europa.eu/economy_finance/publications/publication_summary15289_en.htm
(*3) Prasad, B.R., (2009), ‘Financial regulation: rising to the challenge’, Macroeconomics and Finance in Emerging Market Economies, 2:1, 155 — 173
(*4) http://www.independent.ie/business/irish/ecb-chief-fears-economic-upturn-could-wreck-prospects-for-reform-1781434.html
(*5) http://www.number10.gov.uk/Page19704