BARNIER IS NOT THREAT BUT SHAME ABOUT HIS JOB / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( RECOMMENDED READING )

Barnier is no threat but shame about his job


By Wolfgang Münchau

Published: December 6 2009 19:38

“It’s the first time in 50 years that France has had this role. The English are the big losers in this business.” – Nicolas Sarkozy on the appointment of Michel Barnier to the internal market and financial services portfolio in the European Commission

Mr Sarkozy is right, of course. The English are the big losers. But, then again, so are the French and everybody else in the European Union.

The appointment of Mr Barnier to the most important Commission portfolio after the presidency is indeed unfortunate, but for reasons other than those insinuated by the French president. It has nothing to do with the City of London. It has nothing to do with Mr Barnier personally. The single biggest problem with Mr Barnier’s new job is Mr Barnier’s new job.

He will be in charge of two of the most difficult political tasks the EU has to accomplish in the coming decade: strengthening both the single market and financial regulation. Each is in trouble. The single market has been unravelling at its edges since member states usurped power from Brussels amid the financial crisis. At a time when we are close to having exhausted our macroeconomic room for manoeuvre, reinvigorating it is the best hope for the EU in the long run.

On financial regulation, the task is at least as important. The policy should be defined not in terms of the interests of the City of London but of how to make the EU economy more resilient to financial instability. Currently, policy is all over the place. The EU goes ballistic on hedge funds, yet seems to have little problem with socially undesirable financial instruments such as naked credit default swaps – where buyers seek default insurance on securities they do not own, mostly for purely speculative purposes. Last week’s emasculation of proposals to create a powerful EU-level supervisor should serve as a reminder that narrow national interests remain a dominant force in the Union.

This is the dual mess Mr Barnier will inherit – a single market in trouble and an inconsistent financial reform agenda. If we were really serious about addressing both issues, finance should have been separated from the single market and merged with economics – because the nature of the job has changed.

In the 1980s and 1990s, there was a strong case for combining the internal market and finance jobs. The idea, after all, was to provide a single market for financial services. But if the crisis has taught us one thing, it is that macroeconomics and finance should not be administered by separate bureaucracies. It was that very recognition that led the EU to create a European Systemic Risk Board, a new system of macroprudential supervision.

The question of where finance is located inside the Commission is not about who gets to do what but about how the job gets done. By keeping finance attached to the internal market, the lobbying machine of the financial industry will be able to exert its influence in the same way as before, more often than not to the detriment of the public. Moving finance to economics would have made it much harder for the lobbyists, or at least would have forced them to use different arguments, as economists often focus more on externalities than those who look at a problem from the industry’s own perspective.

There is also a marginally higher probability that the macro-people might have challenged one or two of the intellectually lazy arguments bankers habitually make in defence of the status quo, in particular the assertion that financial innovation creates growth. We know that financial innovation, in combination with macroeconomic imbalances, produces bubbles. But there is not a shred of evidence, theoretical or empirical, that the financial instruments invented in the past 10 years produce sustainable growth.

I would bet that Mr Barnier is not going to be the man to raise any of those uncomfortable issues. The reason he was so keen on the combined internal market/finance portfolio is not because he has any concrete ideas of what to do. The British conspiracy theorists are wrong. There is no secret French plot. The reason why the French wanted the job is more mundane. It is considered powerful by the metric of Brussels power politics.

What mattered for Mr Sarkozy was that he could sell the appointment as a defeat of Anglo-Saxon capitalism. He calculated that a victory declared was a victory won. From his warped perspective, he was probably right. The home crowd was cheering.

But the City of London need not fear. From its perspective, the appointment of Mr Barnier is, on balance, good news if only because it keeps the current structure intact. Mr Barnier will be ring-fenced by a powerful bureaucracy, headed by a British civil servant.

But while Mr Barnier might not do much harm, he might not do much good either. He will be overwhelmed, unable to give sufficient political direction, surmount the formidable national interests in the way of change or confront the lobbies.

He may yet surprise us. But the retention of the dual internal market/finance role tells me that this new Commission will remain without a coherent strategy in two of the EU’s most important portfolios. I find that more troubling than a commissioner who might be hostile to the City of London.

Copyright The Financial Times Limited 2009.