Finance and the macroeconomy: the politics of regulatory reform in Europe

Abstract

This article analyses major changes in the regulation of the financial sector across Europe over the last three decades. The authors explain the timing of major regulatory variation in regulatory outcomes across five countries (Britain, France, Germany, Italy and Spain) in terms of political calculations on the part of elected élites that involve the relationship of financial regulation to other policy areas (including monetary policy and pension reform). The first countries to initiate major regulatory overhauls in Europe were those in which postwar regulatory institutions raised the costs to elected governments of imposing monetary austerity in the 1970s. On the other hand, the move to create single, politically accountable financial regulators in Britain and Germany over the following decades is related by the authors to the more radical effort to promote private savings at the expense of mandatory pensions in these two countries.

Keywords:

• Central banks
• financial regulation
• pension reform
• politics
• regulatory reform

ACKNOWLEDGEMENTS

The authors would like to thank Andreas Busch, Richard Deeg, Peter A. Hall, Mauro Guillen, Susanne Lütz, Ferran Martinez i Coma; Elliot Posner, John Zysman and three anonymous JEPP referees for their helpful comments on earlier drafts of this article.

Notes

In the late 1970s, French governments came just as close to meeting their targets through credit ceilings as the Bundesbank did through open market operations (Chouraqui and Price 1984: table 2).

In the Italian case this was reinforced when the Bank of Italy's obligation to cover the Treasury's shortfall was ended in 1981.

In France and Italy, the banking sector was largely in public hands, rendering the matter of supervision secondary.

The insurance sector was covered through the creation of separate insurance regulators.

Tax incentives in Britain included Personal Equity Plans; in Germany Individual Savings Accounts and favorable treatment of private pensions; in France ‘voluntary wage savings partnership plans’; and in Spain preferential rates on mutual fund and private pension investments.

Labour Party Manifesto, 1997.

The Bank ultimately only lost its regulatory powers over investment products offered by banks and over bank mergers following the Antonveneta scandal in 2005.

The Economist described it as ‘astonishing’ and ‘a dramatic new plan for financial regulation’ (The Economist 24 May1997: 15).

In spite of the Fazio affair in 2005, the Bank appeared to regain its credibility during the 2008–9 financial crisis because Italian banks were not found to be highly exposed to the US subprime market.

See Handelsblatt 8 November 2001 and 1 January 2002.

One Deutsche Bank publication put out in December 2001 argued that ‘the increased significance of private retirement provision going forward … is a major factor dictating the need for a change of supervisory structure’ (Speyer 2001: 3).

Mexico's Ministry of Finance has long overseen its specialized regulatory agencies. Yet in Japan and Korea the move to a single regulator was made in close connection in time to pension reforms.

The Spanish central bank, in particular, was lauded for imposing stricter standards on how banks calculate capital and requiring institutions to allocate part of their profits during good years to reserves. But French banks also maintained better capital adequacy ratios than German and British banks (Financial Times 3 May 2009; Xiao 2009).