TCS Daily


It's the Investments, Stupid

By Jeremy Slater - April 15, 2003 12:00 AM

The inability of Europe's financial markets to keep pace with the economic growth of the US in the 1980s and 1990s has produced plenty of sleepless nights at the European Commission over the past few years.

One important reason for this growth was the steady inflows of foreign capital - mainly from Europe and the Far East - into the US economy during the bull market's two-decade-long run. These helped pay for the servicing of the national debt, supported the restructuring of US industry and maintained the strength of the dollar on the currency markets. The inflows were attracted by the existence of a "single market" in financial services, which meant shareholders could buy stock at very low transaction prices, thus boosting both the prices of individual shares and the markets at the same time.

In an attempt to offset the discrepancy between US and EU markets' performance the Commission nearly three years ago proposed a radical overhaul of how financial services operate in Europe. The economic boffins behind the project wanted to create something akin to the US single market and to do so they launched what became known as the Financial Services Action Plan (FSAP). The proposal was rubber-stamped by EU political leaders at a top-level meeting in Stockholm in 2001 and it soon became part of the EU's ambitious programme to become the world's most "competitive" economy by 2010, a goal that had been agreed upon in Lisbon a year earlier.

When the FSAP was first conceived several major European markets preparing to merge in ways that could have rapidly rendered a lot of existing EU financial services legislation obsolete. To address this concern and speed up the implementation of the plan, a new decision making process was proposed by what was known as the Committee of Wise Men, headed by the former Belgian central banker Baron Alexandre Lamfalussy.

He proposed that two European committees, one for regulation and one for securities, would oversee new legislation and during the creation of new laws these bodies could bypass the European Parliament's powers to review EU policy. This, not surprisingly, was opposed by MEPs, who did not want to be sidetracked by the new process. After months of wrangling in 2001 a compromise was found that allowed the FSAP to move forward on a fast track while still giving MEPs time to debate and change new financial services proposals from the Commission.

The only major hiccough in this process was over the redrafting of a proposed Prospectuses Directive, which was designed to make it easier for companies to raise capital across the EU by harmonising rules on company information. But some financial markets complained that the original proposal had been drawn up too swiftly and would impose too much regulation on them. As usual, the EU was trying to simplify something by making it more complicated.

After this embarrassing episode the Commission has been more cautious with the launch of legislation and has extended further the consultation period with the financial services industry over any new laws.

The Commission's latest proposal, made at the end of March, is a directive that will introduce minimum transparency requirements for information that must be provided by companies whose securities are traded on an EU financial market. Commission officials claim it will enhance investor protection, attract investors to the European marketplace and improve the efficiency, openness and integrity of European capital markets.

By increasing the frequency of financial information from every six months to every quarter the Commission hopes the legislation will remove longstanding national barriers that are linked to transparency requirements in different member states. These in the past have discouraged companies from listing on more than one market in the EU.

The Commission also wants to simplify requirements companies have to fulfil on the number of languages share proposals are translated into and on the way information is disseminated.

"This proposal aims to ensure that investment decisions are based on sound information about issuers of securities - information available to all investors, large and small, experts and non-experts," said Frits Bolkestein, the EU's internal market commissioner, on the announcement of the proposed directive. "Better informed investment decisions will lead to a better allocation of capital. That will help both listed companies and investors and bring enormous benefits for the European economy as a whole."

Bolkestein added that compared to current practice in the US the proposed legislation would be, "a more pragmatic mix of more detailed half-yearly financial reports and light, but reliable, quarterly financial information. That is the minimum modern capital markets need to attract more investment from more people."
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