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Understanding the barriers to a new financial regulation in the European Union: a Gramscian perspective

by Mario Visel

"The world is facing a financial and economic crisis unlike any seen before. How we respond will shape our future for many years to come" 1 . This is the official proclamation to be found on the web platform of the European Commission. Responding to the crisis, the European Union (EU) will gradually implement the new international banking regulation agreement Basel III. Critics say the new rules are unsufficient and incapable for the prevention of another financial crisis possibly occuring within the next decate(s). Supposing their thesis is right: how can it than be explained that no measures are being adopted appropriate to the (right) dealing with the problem? And if there are, what obstacles can be assessed to complicate or even impede the decisions on a tighter financial regulation? Some suggestions aligned with the (neo-)Gramscian theory shall be made in this essay. For this purpose I start with a brief depiction of lobbyism. Then, after unraveling some further ties between the economic and the political sphere, I will have a closer look at the Basle III commitment as the outcome of new relgulation efforts and its evaluation by different groups and representatives. Finally I shall evaluate the analysis data by means of the neo-Gramscian theory.

What is lobbyism?

Lobbyism is, very shortly but crucially defined, "characterized by interest groups that apply external pressure in order to influence the [political] decision-making process". And as Nedergaard further maintains: "from a political science perspective, the organization of interests in the EU is pressure group based" 2 . But what does it mean that the 'organization of interests' is pressure group based? It means that the political representatives of the EU, which are in charge of representing the interests of the European people, do represent

1 http://ec.europa.eu/financial-crisis/index_en.htm (all web-links were revised on 20/22/2010)

those interests which are organized and transmitted by societal groups: the lobby. This

"EU-Lobbycracy" is described by the Corporate Europe Observatory (CEO) as "complex,

often unaccountable decision-making procedure" which through "the lack of a truly

European public debate make Brussels into a paradise for corporate lobbyists" 3 . Others

denominate the European decision-making procedure a "running out the clock", with the

lobbyists exploiting a

"speciality of Brussels: the complicated and interminable legislation process. Decisions develop over years. Officials of the EU-Commission design the drafts. Representatives of the EU-Parliament put them through the mangle. The national governments debate, modify and vote. This altogether is long lasting. A public debate occurs – if at all – when the directives have to be implemented within the national context. On this way many back doors are wide open for the whisperers' silent exertion of influence. A good lobbyist attends an emerging law over years. At every stage he has his say, watches, advertises or threatens" 4 .

Hence the decicion-making process in the EU relies to a (contingent) degree on external

influence by specific interest groups, or say, by certain members of society or social

groups. According to the European Union, the lobbyist's activities can

"usefully be grouped in four categories: 'service functions', i.e. the provision of specific (and often exclusive) services for their members (e.g. the gathering of information); 'lobbying functions', i.e. attempts to influence decision-making processes from outside (e.g. by meeting Commission officials or participating in public hearings); 'decision-making functions', i.e. the attempts to influence decisions from within (e.g. by direct participation in the decision-making process of expert committees selecting research project proposals); 'implementation functions', i.e. the participation in policy implementation (e.g. by taking over management functions in programme implementation)" 5 .

Recent studies on lobbiysm by the CEO revealed some remarkable facts about these

actors and their means of influencing the European political agenda. Regarding to them,

"almost every industry imaginable has its own sectoral lobby group in Brussels", estimating

the total number of lobbyists "to be around 15,000. Over 70% works directly or indirectly

for corporate interests, some 20% represent the interests of regions, cities and

international institutions while only around 10% represent non-governmental organisations,

including trade unions, public health organisations or environmental groups" 6 . This number

of specific interest representatives is even more impressive compared with those of the

3 Lobby Planet: Brussels the EU quarter, CEO, 3rd edition 2005, p.9

4 Die Zeit, 23.11.2006 (German sources were translated by the author)

5 Lobbiyng in the European Union: Current Rules and Practices; Constitutional Affairs Series; European Parliament, p.iii

public representatives for example of the European Parliament (EP), which counts 732. But however the variety of actors may seem, "the key players are formal EU business associations and firms that have established government relations offices in Belgium. A high degree of specialisation is apparent according to sectors or even sub-sectors of business activity and issues". There are furthermore "striking differences" in the approaches of specialised groups, as they "may have particular preferences, resources, forms of management, or lobbying styles" 7 .

forms of management, or lobbying styles" 7 . Herds of Lobbiysts surrounding institutions of the EU

Herds of Lobbiysts surrounding institutions of the EU

Source: http://www.zdf.de

Very interesting is also the metaphor "political market" which is used by EU officials to describe (the importance of) lobby activities: "just as the equilibrium price in goods markets is found by the interplay of supply and demand, the equilibrium level of influence is determined by the supply and demand of information and other goods" 8 . Taking this notion of influence on political decision-making as a consequence of demand for information (and other goods!) directly refers to what a group of European Parliament members labeled a "call for a FINANCE WATCH". Aiming especially on the issue of supply of information or expertise on specific issues or (sub-)sectors, they state that they "can see every day the pressure exerted by the financial and banking industry to influence the laws governing it". And they proceed by claiming that "there is nothing extraordinary if these companies make their point of view known and have discussions on a regular basis with legislators. But it seems to us that the asymmetry between the power of this lobbying activity and the lack of counter-expertise poses a danger to democracy" 9 .

7 Lobbying in the European Union, p.iii

8 Ibid., p.iv

But not only the lack of a balancing counter-expertise as a different perception of facts or

their final explanation can be seen as crucial to the policy making process. As critically

admitted by the EU: "the extent of 'knowledge and understanding' of the EU machinery

frequently makes the big difference between successful and inefficient participants in the

lobbying theatre". Following this account,

"a certain symbiosis can be detected between interest groups and bureaucracies. The latter have a tendency to construct stable relationships with the former as a means of securing some sort of 'negotiated order'. Interest groups, for their part, also exhibit a preference for public bureaucracies as a venue for obtaining reliable information and influencing public policy, particularly planned or impending legislative measures" 10 .

Referring to CEO,

"the Brussels corporate lobbying scene numbers well over 1,000 lobby groups plus hundreds of public relations companies and law firms offering lobbying services, dozens of corporate-funded think-tanks as well as several hundred ‘EU affairs’ offices, run by individual corporations", from which "a clear majority represents the inte-rests of big business. Social and environmental groups, although increasingly represented in Brussels, cannot match the financial and organisational power mobilised by industry" 11 .

Ties of interests

Besides the more formal channeling of interests described above as lobbyism, another

habit of influence can be discerned which could be linked to a certain group identity or

identity of interests. It is this the dense linkage between (leaders of) the finance industry

and (high) political representatives. For years now it can be observed that the occupation

of managing and politicial positions are easily changeable (in both directions), and in fact

they do swap all over the time. It is striking that, let's say, one and the same interest

representative is championing in different positions and in different fields (e.g. politics and

economy). Here are (only a few) examples of this linkage.

Let's take for instance the case of Goldman Sachs. Many aspects can be stated of the

former investment bank 12 which mark it as a very distinctive institution, overlapping very

distinctive fields of action. Its proximity as an economic entity to the political sphere is one

of the most obvious facts. Numbers of Goldman Sachs representatives have direct access

10 Lobbying in the European Union, p.iv

11 Lobby Planet, p.9

12 The bank had to change its status into a commercial bank in 2008 as a result of the financial crisis.

to political executives (White House, EU, etc.). Its internal experts are members of advisory committees, think-tanks, discussion forums and lobby groups all over the world (Financial Stability Board (FSB), International Swaps and Derivatives Association (ISDA), Basel Commitee on Banking Supervision, etc.). But most striking is the fluent shift of employment positions of its members between private enterprise ond the one hand and public institutions on the other. A few examples: Both US presidents Bill Clinton and George W. Bush recruited their ministers of finance out of the front rows of Goldman Sachs, and even Barak Obama occupied executive key positions with (former) staff of the company. Mario Draghi, former vice president and managing director is now governor of the Italian federal reserve Banca d'Italia, a leading member of different councils of the European Central Bank (ECB) and chairman of the FSB. Robert Zeollick, also a previously managing director of Goldman Sachs, is now president of the World Bank. This integration of group interests can not only be explicitly demonstrated beginning with certain companies but also with single persons. Let's take the case of Josef Ackermann, or what some call the "Jo-Ackermann-Show" 13 . Ackermann is not only the CEO of the Deutsche Bank and the chairman of the Board of Directors of the Institute of International Finance (IIF). He is furthermore engaged with industrial companies such as Siemens, Bayer, Lunfthansa or Shell, visiting professor of leading universities and member of several organisations and networks like the Initiative Finanzstandort Deutschland (IFD), the World Economic Forum or the Bilderberg Group. But the influence of Josef Ackermann has not exhausted with the hold of this many ranks, he is aleged to be the most powerful banker of Germany and among the five most powerful banker of the world 14 . His close contact for instance to the German chancellor Angela Merkel is affirmed not only by the special treatment he received by the celebration of his 60's birtday in the chancellery (on public expense). At the zenith of both, the financial crisis in 2008 and the Euro crisis in 2010, he was urgently called by Angela Merkel and Wolfgang Schäuble as (chief) negotiator and for the purpose of publicly reassuring the trembling markets. Jörg Asmussen, another example, was state secretary in the ministry of finannce in Germany while advocating the financial deregulation from within a lobby group. He was furthermore a directorate member of the German Federal Financial Supervisory Authority (BaFin) in charge of bank regulation. Again he was a member of the supervisory board of the Deutsche Industriebank (IKB) which before the financial crisis was heavily involved in the US subprime speculation, trading with assets whose permission were promoted by

13 WirtschaftsWoche (WiWo), 04.05.2010 14 Balser Zeitung, 16.12.2009

Asmussen and his lobby group. The IKB had to be saved from bancruptcy in 2007 with the state supporting the bank's loss. So Asmussen, in the end, was not only advocating the implementation of financial assets which were subsequently traded by his bank for the purpose of high profit achievement. He was then, after the apparentness of the inflated value of this papers, also in a key role in charge to rescue those financial institutions who suffered severe deficits by purchasing them. Further examples are the former German chancellery minister Hans Bury, who after his promotion of Germany as a leading financial centre directly changed to Lehman Brothers. Another state secretary responsible for bank controling was Cajo Koch-Weser, who after this job was hired as adviser at the Deutsche Bank. The economist Otmar Issing held a post in the chancellery to design a new financial architecture at the time when he was also adviser at Goldman Sachs. Jacques de Larosière is the co-chairman of the financial sector lobby organization Eurofi and until recently was adviser to the French bank BNP Paribas for many years. In 2008 the former IMF managing director was also called by the EU- Commission to chair an 'ad hoc high-level group on financial supervision' as a response to dealing with the financial crisis which begun in 2007 as a subprime mortgage crisis in the USA.

Basle III

Let's continue with the financial crisis, which "has unleashed a huge debate on the state of the global financial system. As politicians examine fiscal solutions and regulatory reforms, the big question is how supervision and regulation should be changed to avoid a repetition of the present meltdown" 15 . But how did the politicians try to answer this questions? "In the EU", a coalition of NGOs specialised on the issue discerned, "the Commission and the Council has set up a High Level Group of eight experts to advise them on how to reform the financial system in terms of supervision and regulation". This group, named the de Larosière group after his (already mentioned) chairman, is – surprise – one composed of

individuals that are closely related with or in chief positions in the financial sector and thus,

"have been implicated in the crisis (

deregulated financial sector and can be deemed to have supported hard-line, neo-liberal

policies that arguably created the financial crisis" 16 .

).

The majority have expressed strong support for a

15 Would you bank on them, Why we shouldn’t trust the EU’s financial “wise men”; paper from CEO,

Spinwatch, Friends of the Earth, Lobby Control; Authors: Kenneth Haar, Andy Rowell, Yiorgos Vassalos, p.3

16 Ibid.

The EU meanwhile is convinced of applying the appropriate "measures to restore stability to financial markets and to get credit flowing again. These must be matched by robust reform to prevent a repeat of the crisis and to rebuild trust in the banking industry", and therefore the union has "already taken steps to increase protection for bank depositors, make credit ratings more reliable, improve risk management in financial firms and reinforce the solidity and supervision of banks and insurance companies" 17 . The outcomes of these steps to a reform have been finally presented in September 2010 as the 'Basle III Accord on Capital Requirements'. Basle III was supposed to set out new regulations for levels of capital reserves, liquidity and leverage ratios 18 . After all, the judgement of the reform has consequently been quite controversial. And it is interesting the fact that both, the affected and the critics of the financial industry, somehow coincide in refusing it. However the positions of both sides are everything but coherent. While the one side calls the outcome "the bankers victory dance" 19 , the other warns against "banks to perish" 20 . When the Basel III reform was the outcome of expert groups with high expertise on the issue and a direct insight into the (functioning of the) sector, then what can be suggested for the dissent or even contradiction of the reaction. A possible answer may be: interests. Let's see the difference of the latter beginning with the anouncement of the European Banking Federation (EBF) referring to the new standards. With a press release 21 titled "European Banks Warn Against Economic Consequences of Supervisors’ Agreement", the EBF "takes note of the decision on capital requirements reached yesterday (12. September) by the Basel Committee, which it considers as very demanding". It concludes that these requirements "will have consequences on the volume and cost of lending and therefore a cost on our economy too", and hence reiterates its "concern about the lack of a thorough cumulative impact assessment before the adoption of all the regulatory measures proposed as part of the global financial reform". At the beginning of November the federation continued calling on G20 leaders “to carefully weigh all aspects of the proposed regulatory reform agenda at their Seoul Summit“. The EBF members “strongly oppose more capital surcharges for systemically important financial institutions (SIFIs). While strengthening stability is indeed a priority, there are different means of meeting the concerns of regulators about systemic risks", while raising

17 http://ec.europa.eu/financial-crisis/reforming/index_en.htm

18 As it is not the purpose of this paper to analyse the details of the agreement but to examine its progress

and the caused reaction, we shall concentrate below on the assessments of the respective 'experts'.

19 The Guardian, 13/09/2010

20 Financial Times Deutschland (FTD), 23/09/2010

21 EBF, Press Release, 13/09/2010

again their "concern about the cost of Basle III measures on trade finance and export credit, which could be made much more expensive as a result of the global banking rules". They furthermore "insisted on the necessity to maintain a proper level-playing field, in particular in the implementation of international measures in different jurisdictions". Different implementations, the European bankers finally emphasize, "would result in competitive distortions, to the detriment of our economy" 22 . Then after the summit, the EBF "generally welcomed the G20 leaders' declaration concluding the Seoul Summit. A positive outcome of the Seoul summit", it pleasantly confirms, "indeed is the leaders' commitment to ensuring a level playing field" 23 . But the EBF was not the only voice in favor for the conservation of a convenient 'playing field'. Already in March at the Center of Financial Studies (CFS) in Frankfurt, Joseph Ackermann held an ardent speech on "More Stability for the Global Financial Markets – In the View of Banks", in which he valued the developments and suggestions for future regulation measures as "very problematic". The "exposure of international integrated financial markets" he agrues, would be a "dramatic rupture with the foundation of economic and sociopolitical norms" 24 . Later this year in Vienna the leader of the Deutsche Bank drew "real horror scenarios: should the proposals discussed by politicians and supervisors be implemented one by one, 9,7 million jobs would be at stake because the banks were obliged to cut back credit lending to firms and to roll over the cost of capital to clients. The consequence: smaller growth, less investment and downsizing" 25 . This assessment was backed by the chief of the British Standard Chartered Bank Peter Sands, who added: "There is a price for making the banking system more secure and stable: And this price will inevitably be carried by the real economy" 26 . Leading British banks as HSBC or Barclays recently warned their government against a relocation of their head quarters in concern over tighter rules on bonuses. Tighter rules on financial activities mean, regarding to a research conducted by PricewaterhouseCoopers, that "up to £1tn is poised to be drained from the financial system, hampering economic recovery and depriving households and businesses of loans and other forms of credit" 27 . These estimations however are severely opposed by other economists, NGOs, and political functionaries. According to the president of the Institute of Economic Research (Ifo) Hans-Werner Sinn, the new standards of Basle III are "not strict enough for the

22 EBF, Press Release, 05/11/2010

23 EBF, Press Release, 12/11/2010

24 http://www.db.com/medien/de/downloads/CFS_Rede_JA_17.03.2010.pdf

25 FTD, 13/06/2010

26 Ibid.

prevention of another crisis" 28 . Also the scientific advisory committee of the German

Ministry of Economy recommends "more radical reforms" 29 . "No reasonable safety buffer is

big enough", writes the Economist, and that "the crisis has shown that if they [banks] are

not rescued, they can topple the entire system. That is why swaggering talk of letting them

burn next time is empty. Instead a way needs to be found to impose losses on their

creditors without causing a wider panic – the financial equivalent of squaring a circle" 30 .

Also the World Economy, Ecology & Development Association (WEED) questions the

sufficiency of the reforms:

"Given the very unsecure economic conjuncture with global imbalances, debt

crisis and the risks of a currency war the next crisis might come before the new

the basic philosophy of Basle

II prevails: risk measurement and management remains in the hands of the banks, although the ideology of self-regulation of the markets went bankrupt in the crisis. Finally Hedge Funds, Private Equity Funds and other highly leveraged institutions are not captured by Basle III, which is a major loophole. All in all, Basle III can be at maximum a first step towards a future system of really efficient regulation of finance. If it were the cornerstone of new financial architecture, this building would be very unsafe. Basle III makes the casino safer, but what is needed is the closing down of the casino" 31 .

agreement is fully implemented. Furthermore (

)

And even the EU-commissioner in charge of the internal European market Michel Barnier

remarks at his recent speach at the Securities Industry and Financial Markets Association

(SIFMA) in New York that: "Yet, we are only half way down the road to build a safer and

more stable international financial system. Much progress has been made. But in some

areas, much more remains to be done" 32 .

Social domination and intellectual leadership

Before we can draw any conclusion on the above mentioned datas and circumstances, it

shall be fertile to have a brief but crucial look on what Antonio Gramsci can tell us about

societal struggle, social order and interest or group formation. Regarding to Gramsci "the

methodological criterion on which our study must be based is the following: that the

supremacy of a social group manifests istelf in two ways, as 'domination' and as 'intel-

28 WiWo, 25/09/2010

29 Handelsblatt, 02/06/2010

30 The Economist, 26/08/2010

31 Basle III Accord on Capital Requirements - The cornerstone of financial reforms?, WEED

32 EU-Commission, SPEECH/10/612, 29/10/2010

lectual and moral leadership'" 33 .

For Gramsci and its scholars society is not a wholly heterogenous bulk of individuals, but a

fragmented realm of "various social actors – importantly including social classes 34 ( ),

actors whose collective self-understanding shape their social identities, purposes, and ho-

rizons of political action" 35 . Domination is obtained "when a social group succeeds to gain

the general acceptance of certain ideas by a variety of other groups, when it is able to

legitimise its position through the allocation of material resources to subordinates and to

establish or acquire legal public institutions" 36 .

"Every social group", Gramsci claims referring to intellectual leadership, "creates together

with itself, organically, one or more strata of intellectuals which give it homogeneity and an

awareness of its own function not only in the economic but also in the social and political

fields". These organic intellectuals occupy the leading position of

"an organiser of society in general, including all its complex organisms of

because of the need to create the conditions most favourable to

the expansion of their own class; or at least they must possess the capacity to choose the deputies (specialise employees) to whom to entrust this activity of organising the general system of relationships external to the business itself" 37 .

services (

)

Josef Ackermann, we might state as example following this definition, is a paragon of

deputiy in charge of organising the collective interests of money business. Too we can

define law firms offering lobbying services, the dozens of corporate-funded think-tanks

and the public relations companies as 'specialised employees' of the finance industry.

Hence: lobby groups organise and represent specific group interests. In order to assert

these interests, they must influence the general order in a way most favourable to their

possible achievement, or shall we say: 'to maintain a proper level-playing field'.

How do they achieve such order? Through the general acceptance of their ideas, the

establishment or aqcuirement of public institutions, and through the allocation of material

resources. If we now enclose the thesis 38 that an order in favour to the finance and

banking industriy has already been (gradually) implemented since the 1980s, we could

argue that the current 'pressure exerted by the financial and banking industry to influence

the laws governing it' is the endeavour to prevent a backlash of this gainful alignment. Why

33 Gramsci, 85; in: Storey, John, Cultural theory and popular culture: a reader, Pearson Education, 2006

34 The term 'social classes' is frequently used in the literature. I prefer instead to speak about 'social groups'

35 Rupert, M., 2008, 'Labor and politics in a multi-scalar globalizing capitalism: Bieler and the new neo-

Gramscians', Labor History 49,1 (February, 2008), p.113

36 Bieler, Andreas / Morton, Adam David (2003): Neo-Gramscianische Perspektiven, in: Schieder,Siegfried /

Spindler, Manuela (Hrsg.): Theorien der Internationalen Beziehungen. Opladen: Leske&Budrich, p.341

37 Gramsci, 87

38 As an intervening variable

a backlash? Because this dominating (neo-liberal) 'ideology of self-regulation of the

markets went bankrupt in the crisis'. But how, if (at least) one keystone of domination,

namely ideas and their general acceptance, has broken off 39 , is the finance industry still

trying to preserve a proper 'state of the global financial system'? Through 'silent exertion of

influence'; through lobbyism (included the means of threatening), nepotism and, probably

most important, intellectual leadership.

The latter, as we saw before with the discussion on the impact of a stronger financial

regulation, is a hard contested circumstance for the reason that, as Gramsci affirms, e very

relationship of dominance in modern society is inevitably an educational relationship 40 .

The huge demand (or lack) of information and expertise on issues regarding to financial

markets and its proper regulation (to 'restore stability to financial markets' and to reform

them to 'prevent a repeat of the crisis and to rebuild trust in the banking industry') can

finally be seen as a tender spot for political influence. And still the neo-classical economic

theories predominate (at least) within the financial industry as they seem to offer the most

appropriate set of regulation measures for their business activities, since "Hayek and his

co-thinkers have inspired policies to extend 'free markets' and 'roll back the state'. The

view is that such policies are neccesary both for economic efficiency and personal liberty.

The alternative, in Hayek's words, is 'The road to Serfdom'" 41 . And even if this 'ideology'

supposedly went bankrupt, there still remains 'the lack of counter-expertise' within the

political decicion-making process, and one might append also to a considerable extent

within the public (hence democratic) debate.

So the procedure of modeling and designing a proper financial regulation architecture

continues. With most expertise coming from the financial sector itself, and minor influence

from other social groups. In this sense, corporations like the IIF are decided to

"meet the changing needs of the financial community. We strive to sustain and enhance our distinctive role on the basis of the professional excellence of our research, the unmatched breadth of our membership, our extensive relationships with policymakers and regulators, and the strength of our governance. Our mission is to support the financial industry in prudently managing risks, including sovereign risk; in developing best practices and standards; and in advocating regulatory, financial, and economic policies that are in the broad interest of our members and foster global financial stability“ 42 .

39 It could be argued that also the current allocation of material resources is a problematic issue able to

deprive the legitimacy of the current order. But this must be a question for another study

40 Gramsci, p.87

41 Hodgson, Goeffrey M., Varieties of capitalism and varieties of economic theory, Review of International

Political Economy 3:3 (Autumn 1996), p.393

42 http://www.iif.com/about/