EU finance chiefs face test on capital-raising

WHEN European Union finance ministers meet on Monday they will be well aware that they face a momentous decision.

Will they endorse the thrust of ingenious proposals for speeding up the development of pan-European capital markets from the Lamfalussy Committee - or does Europe still lack the political will to act decisively to reform its capital markets even though failure to do so threatens to undermine its international competitiveness and slow economic growth?

Werner Seifert, chief executive of Deutsche Brse, is not alone in arguing that it is primarily the inefficient use of capital that accounts for the gap between the performance of the US and EU economies. When the Economic and Financial Committee (Ecofin) ordered up the Lamfalussy report in July there was widespread speculation that the proposal was a French plot to create a single Paris-based EU securities regulator.

Instead Alexandre Lamfalussy, peer review would ensure they did so consistently.

The basic thesis of the report is that as EU capital markets develop, replacing banks as the prime source of corporate finance, the Union will not realise the full potential of the euro until its fragmented markets are integrated to create deeper pools of interconnected liquidity.

These would be based on, among other things, a common prospectus for cross-border capital raising, common listing requirements and one set of accounting standards.

"The whole financing chain from startup capital to IPO to wholesale debt-raising has to work efficiently . . . the overall strength of European capital markets will be as strong as its weakest link," it argues.

Two facts he cites underscore the point. Between 1984 and 1998 the real rate of return to US pension funds was 10.5% compared with 6.3% for their regulated and nationally-based European peers; and Europe has only a fifth of the venture capital per head of the US.

Since giant multinationals raise money globally, the report hints that medium-size, often fast-growing companies would be the biggest losers if Europe's capital markets cannot deliver.

Other problems include diverse legal and tax systems and bankruptcy laws.

And the report calls on the private sector to do its share by, for example, cutting the e 1 billion (600 million) of "excessive costs" in cross-border trading and settle-former head of the the European Monetary Institute, the precursor of the European Central Bank, rejected this idea as too cumbersome in his interim report on the Ecofin table on Monday.

Arguing that Europe can "no longer afford the luxury of regulatory inefficiency", he proposes speeding up the creation of a single European market in financial services.

One close observer says: "It is a market-opening, market- liberalising model which rejects a 'fortress Europe' approach."

The tortured progress of efforts to establish a pan-European system for regulating takeovers symbolises the inadequacy of the existing processes of financial sector reform. After 11 years of negotiating, there is still no takeover directive in force.

Lamfalussy describes the pace of change in global markets as "breathtaking and accelerating". But the EU's ability to make the most of the euro is held back in part by arcane lawmaking procedures established when the currency was not much more than a gleam in its advocates' eyes.

Lamfalussy says: "There is no rapid mechanism in place to update Community Directives to (take account of) new market developments."

To cut through this logjam the proposals call for the EU to pass broad financial reform laws to be implemented quickly through an obscure EU legal process called comitology.

The detailed regulations would be established by a powerful new Securities Committee backed up by a committee of EU financial market regulators and advised by market practitioners.

EU member states would be responsible for putting details into practice, and a system of

ment of securities. Lamfalussy calls for a faster pace of reform than the target date of 2005 set by heads of State earlier this year. His committee wants his proposals endorsed at the EU's Stockholm summit in March, and up and running by 2002.

With no other options on the table, any signs of wavering by Ecofin will send a powerful signal to the financial markets that, in spite of the single currency, Europe is going to muddle along with structures that are arguably more damaging to its economic performance than the (diminishing) inflexibility of its labour markets.

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