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Europe’s Harmonic Discord
Karel Lannoo
01/01/2004
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The EU has recently introduced a breathtaking reform of its capital markets regulations. From 2005 on, all listed companies issuing securities in the EU will have to use International Accounting Standards. They will be subject to tighter insider trading rules, to a single EU-wide scheme for raising debt and equity capital, and may have to follow quarterly reporting standards. Stock exchanges and investment firms will be subject to more stringent investor protection rules. Investment funds will be allowed to sell a wider set of funds on a European basis with a single license. Moreover, a dramatic increase in cooperation between supervisory authorities in securities markets during the last few years should ensure that the same standards apply all over.
In contrast, corporate governance matters were, until recently, kept on the backburner. It is only the fallout from corporate events in the United States that led the European Commission to come forward with more far-reaching reform proposals. The European Commission used to argue that there was no need for a European initiative in the area of corporate governance, as this subject had already been well covered at the member-state level and national corporate governance codes were fairly similar in their nature and recommendations. The events in the United States brought radical ch-ange: Suddenly, the European Commission is proposing to compel companies to comply with a national corporate governance code based on some minimum supra-national criteria.
Misguided
The reasons for intervening in the area of corporate governance through legislative harmonization—that is, ensuring the rules in each EU member state are the same—are at least misguided and at most unwarranted. The EU has come forward with a single study arguing that a more integrated capital market would raise the EU’s real GDP level by 1.1 percent ($149.7 billion in 2002 prices) in the long run. While such measurements are politically popular and easily marketable, they are nevertheless fraught with methodological pitfalls. In addition, no attempt has been made to measure the extent to which the proposals put forward by the commission will effectively bring about an integrated financial market.
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