Policy Summary
The repercussions of the global financial crisis on the real economy have been severe, with unemployment rising across Europe.
Some EU member states have been severely affected. The International Monetary Fund (IMF), the EU and the World Bank agreed a $25.1 billion economic rescue package for Hungary last November .
Other countries that have been significantly affected include Ireland, where the prime minister, Brian Cowen, predicted that the country will see a

“10% drop in living standards over the next two years”.

 Romania recently obtained an international bailout package worth 20 billion euros.
Public responses: Stimulus or regulation?
A gulf has emerged between countries that want to increase the size of their fiscal stimuli, and those who prefer to concentrate on fixing regulation. The Barack Obama-led US administration has urged its European partners to increase the size of their stimulus plans, while German Chancellor Angela Merkel and French President Nicolas Sarkozy have led resistance to the calls, preferring to focus their efforts on reaching a global agreement on regulation.
The Franco-German line ended up prevailing among EU leaders, who thrashed out a common strategy before the G20 summit in London, pushing for tighter rules to regulate global financial markets and tax havens. But they did not make any additional commitments to fiscal stimulus plans promoted by the United States.
UK Prime Minister Gordon Brown has in the past called for an increased fiscal stimulus. However, Brown differs widely from his continental allies over financial regulation. The gulf between the UK and Western Europe has been apparent on many issues.
Issues
The European Union is currently in the process of approving measures to tighten regulation of financial markets, banks and insurance companies. They include:
A European financial supervision package, featuring two elements:

• Macro-prudential supervision: Measures to establish a European body to oversee the stability of the financial system as a whole.
• Micro-prudential supervision: Proposals on the architecture of a European financial supervision system.

Regulating capital markets and market actors
The Commission is adopting a ’safety-first approach’ to regulating capital markets and market actors, and is filling in the gaps where European or national regulation is insufficient or incomplete:

• Supervisory rules: A rolling programme of actions, beginning in 2009, to establish a more consistent set of supervisory rules. To be finalised in the autumn.
• Credit rating agencies: The failure of credit rating agencies to uncover the true value of subprime mortgage-backed securities has resulted in calls for greater regulation of the sector. The Commission tabled proposals in November which were approved by the Parliament in April and officially endorsed by the Council in July.
• Hedge funds and private equity: A comprehensive legislative instrument establishing regulatory and supervisory standards for hedge funds, private equity and other alternative investment funds was proposed at the end of April and is currently the subject of fierce debates between Parliament and Council.
• Derivatives: A report on derivatives and other complex structured products was published in July and provided a basis for Commission initiatives to increase transparency and ensure financial stability.
• Prudential capital: Before the crisis hit Europe, Brussels had proposed a review of the Capital Requirements Directives. This has since been approved by the other EU institutions. Nevertheless, fresh legislative proposals are now in the pipeline to increase the quality and quantity of trading-book activities and tackle complex securitisation and unfair manager remunerations.

Retail financial products
The economic crisis has unnerved European savers as banks have come close to collapsing, while credit has become less and less accessible. The Commission hopes to bring political consensus to bear on these issues as it unveils initiatives in the coming year:

• Retail investment products: A communication to strengthen the effectiveness of marketing safeguards was published in April 2009.
• Investor and financial consumer protection: The Commission will unveil further measures to reinforce bank depositor, investor and insurance policyholder protection (due: autumn 2009).
• Responsible lending: Measures on responsible lending and borrowing and on credit histories are due in autumn 2009 after the Commission launched a consultation in June.

Sanctions for market abusers
To ensure more effective sanctions against market wrongdoing, the Commission will take the following steps:

• Market abuse: Review the Market Abuse Directive (due: autumn 2009).
• Strengthening sanctions: The Commission will table proposals on how sanctions could be strengthened in a harmonised manner, and how their enforcement could be improved (due: autumn 2009).

Insurance
Reform of insurance regulation was finalised after lengthy negotiations. The Solvency II Directive introduces a risk-based approach as an alternative to the existing ‘flat-rate’ system for insurance companies’ capital requirements. It also seeks to reform supervision procedures, with the intention of increasing cooperation among national supervisors, especially for multinational companies. The proposal was approved by EU countries before being passed by the European Parliament on 22 April.
Links

• European Council: Political agreement on financial supervision package (19 June 2009)
• European Commission: EU High-level group on financial supervision (De Larosière report) (25 February 2009)
• European Commission: Proposals on financial supervision (27 May 2009)

Non-assigned links

• European Commission: Proposed Regulation on credit rating agencies (12 Nov. 2008)
• European Parliament: Vote on credit rating agencies (23 April 2009)
• EU Council: Endorsement of credit rating agencies reform (27 July 2009)
• European Commission: Proposal to review Solvency (26 February 2009)
• European Parliament: Adoption of Solvency II (22 April 2009)
• European Commission: Draft directive on alternative investment funds (29 April 2009) [FR] [DE]
• European Commission: Communication on derivatives (3 July 2009)
• European Commission: Proposed review of the Capital Requirement Directives (1 October 2008)
• European Parliament: Vote on 2008 review of the Capital Requirement Directives (6 May 2009)
• EU Council: Endorsement of the review of the Capital Requirement Directives (27 July 2009)
• European Commission: Informal proposal on CRD review on remuneration policy (29 April 2009)
• European Commission: Informal proposal on CRD review on trading book and re-securitisation (29 April 2009)
• EU Council: Ecofin counclusions on limits to loans in good times (7 July 2009)
• EU Council: Ministers adopt review of Capital Requirements Directives as proposed in October 2008 (27 July 2009)
• European Commission: Communication on packaged retail investment products (30 April 2009)
• European Commission: Public consultation on responsible lending (15 June 2009)

International Organisations

• G20: London Declaration (2 April 2009)
• G20: Washington Declaration (15 November 2008)

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