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EU Lashes Out at Finance Industry

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Daniel Hannan MEP
October 5, 2009
The EU’s “Alternative Investment Fund Managers Directive” has panicked the financial sector. Critics complain that the draft law is burdensome, expensive, protectionist and pointless. Boris Johnson, the Mayor of London, was in Brussels last month, pleading with Eurocrats not to push ahead with proposals that, in their current form, would close down the City. Pension funds and venture capitalists are realising – to their horror – that the draft rules don’t just apply, as they had thought, to hedge funds, but to all investment funds. Billions could be wiped from the value of managed assets.

Strangely, though, no one seems to be asking the most basic question of all, namely, “To what problem are these rules a solution?” The proposals were rushed out in the aftermath of the financial crisis. The EU wanted to show that it was doing something, and regulating the “locusts” of private equity seemed to fit the bill. The trouble is that, even according to the EU’s own studies, investment fund managers played no role whatever in the crisis.

You can blame an awful lot of people for the credit crunch: banks, financial regulators, credit rating agencies, governments, central banks. But you can’t blame the hedgies – many of whom were, on the contrary, among the first casualties.

The trouble is that no one in Brussels is much disposed to draw that distinction. Bankers, stockbrokers, fund managers – they’re all pin-striped spivs, right? The fact that the Mayor of London is lobbying against the scheme is regarded as a point in its favour. London is viewed by many Eurocrats as a lawless free-city where freebooting financiers amass huge fortunes at the expense of Continental workers.

But it won’t just be London that is hit. Every financial centre in the EU – in the world, come to that – will suffer. Every company funded by venture capital will be deleteriously affected (can supporters of these rules truly have been thinking of, for example, German wind farms?) Every pension-holder will be worse off. Every overseas investment fund manager seeking to do business in Europe will be disadvantaged.

All this in order to solve a non-existent problem. No, let me rephrase that: all this to create a non-existent problem. The most perverse aspect of the whole scheme is that the new rules on depositories, and the rules that make it harder to diversify outside the EU, will serve to increase systemic risk – the very thing the directive was supposed to reduce. Not for the first time, Brussels is using a sledgehammer to miss a nut.

What lies behind the whole wretched scheme is the EU’s attitude to the free market. Few Eurocrats, these days, are formally socialist; almost no one argues that industries should be operated by governments. But nor exactly do they believe in capitalism. Free enterprise is allowed on grounds that it is the best way to generate revenue for welfare programmes and other state schemes. Markets are tolerated, provided they are regulated.

Behind it all lies an essentially mediaeval mentality, a belief that objects have fixed values, and that inflating their value is somehow immoral. These venture capitalists, runs the reasoning, they don’t make anything, they don’t refine anything, they simply profiteer from other people. How can that be beneficial to the economy?

The answer to that question, of course, is to see how the EU fares without them. Already, some are relocating to Geneva, Singapore and elsewhere rather than accept the fiscal and regulatory regime they can see coming. The financial sector may be the one part of our economy that has the locomotive power to drag us back into growth. This is no time to kill its engine.

Daniel Hannan is the Member of European Parliament for South-East England, recently elected to a second five-year term. He gained world renown for his biting and eloquent critique of Prime Minister Gordon Brown’s economic policies on the floor of the European Parliament, spread virally via YouTube. Hannan blogs every day at the London Daily Telegraph: www.hannan.co.uk.