European Commission

Credit crunch – the EU at work

(28/10/2008)

The crisis that started in the US over a year ago has sent shock waves around the globe. Former giants of the financial world have found themselves suddenly facing bankruptcy. Inevitably, the crisis is also having an effect on households and businesses - economic growth has slowed sharply and in some EU countries unemployment has begun to increase for the first time in several years.

In the EU, the turmoil has prompted action on many levels – by national governments, the European Central Bank and the Commission. All have been working closely together to protect savings, maintain a flow of affordable credit for businesses and households and put in place a better governance system for the future.

Amid fears of a global recession, the Commission is pressing for rapid adoption of measures proposed in June to help small businesses, which create most new jobs in the EU.

It is also asking the European Parliament and the 27 EU member countries to quickly adopt the proposed directive on capital requirements for financial institutions, aimed at reining in excessive risk-taking by banks and improving supervision of banks that operate in different EU countries.

The Commission is drawing up proposals for stricter regulation of credit rating agencies. These agencies advise investors on how safe investments are, but they failed to spot some of the risks that led to the current crisis.

The Commission is also looking at the issue of executive pay, amid concern that highly-paid bankers are not held accountable for making poor investment decisions.

On 26 November 2008 the Commission announced a comprehensive plan to help the EU economy recover from the crisis. Combining coordinated national action with EU policy, the plan proposes injecting €200bn into the EU economy to boost purchasing power, generate growth and jobs and boost Europe's longer-term drive to become a prosperous low carbon economy. In response to the crisis, the Commission is committed to driving European coordination, working tirelessly to improve global cooperation and to applying EU law flexibly and fast.

On 25 February group of financial experts led by former Bank of France governor and IMF managing director put a raft of recommendations to strengthen supervision of the EU’s financial institutions and markets. Recommendations include developing common rules for investment funds across all 27 EU countries, capping bankers’ bonuses in line with shareholder interests and establishing a crisis management system for the EU’s financial sector.

The recommendations and the general approach to the crisis were discussed at an extraordinary meeting of EU leaders on 1 March. Presidents and prime ministers vowed to preserve the single market, promote growth and reject protectionism. This was followed three days later by a Commission proposal on the reform on the financial system. The plan calls for a supervisory system combining greater oversight at EU level with a stronger role for national supervisors.

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