Tackling the Euro Crisis

EU Finance Ministers Take On Hedge Funds

AFP

European Central Bank President Jean-Claude Trichet (left) and European Commissioner for Economic and Monetary Affairs Olli Rehn at a meeting of European Union finance ministers in Brussels this week.

Europe is serious about introducing new rules to rein in hedge funds. Finance ministers gathered in Brussels want to pass new financial market regulations, but concern about the falling euro has overshadowed the meeting on Tuesday. Comments from Germany haven't helped, say some.

European Union finance ministers are meeting in Brussels on Tuesday in an effort to agree on rules governing the regulation of hedge funds. And, in a break from the 27-member bloc's consensus-driven past, the ministers will likely do so over the objections of Great Britain.

"We are a community and sometimes there are decisions made against a single member state. It can happen to any member," said German Finance Minster Wolfgang Schäuble -- back at work following a week of health problems -- on Tuesday. "I think Great Britain understands that."

The new rules under consideration would require hedge funds -- seen by many as having exacerbated both the financial crisis as well as the current troubles encountered by the euro -- to register should they wish to do business in the EU. Furthermore, they would be forced to disclose their investment strategy in order to improve transparency.

Britain was particularly opposed to the new regulations for hedge funds. Some 80 percent of all European hedge funds are based in London and the Labour government under Gordon Brown -- which was recently voted out of office -- was concerned that EU regulations might harm the city's status as a financial capital.

'No Sense'

EU finance ministers on Tuesday were also considering a tax on financial transactions within Europe as a way to ensure the financial industry's involvement in efforts to overcome the crisis. Luxembourg Prime Minister Jean-Claude Juncker, who also chairs meetings of euro-zone finance ministers, was initially optimistic that such a rule would be passed. "Those who are not innocent of the mess we currently find ourselves in are going to have to pay," he said on Monday.

But on Tuesday, Schäuble indicated that the mood had shifted. "It makes no sense to introduce rules when one knows beforehand that they won't work," he said. There is widespread concern among the gathered ministers that such a tax could make investors wary of doing business in the EU. German Chancellor Angela Merkel had also recently made it clear that she was skeptical of a financial transaction tax, saying there was insufficient international support for such a measure.

The meeting in Brussels comes amid an atmosphere of deepening concern as the European common currency continues its fall against the dollar. On Monday, the euro hit a four-year low of just $1.2324 and had only recovered slightly by Tuesday. Finance ministers went out of their way on Monday to defend the currency, with Juncker saying "we trust that the euro is a credible currency."

The continuing fall of the euro comes despite the €750 billion support package passed by euro-zone states last Monday in an effort to address the sovereign debt crisis that has enveloped Europe. Investors are concerned that the package, particularly the European Central Bank decision to begin buying up bonds issued by euro-zone countries, could drive up inflation.

Buying Time

In addition, a number of officials, including several in Germany, have expressed concerns about the efficacy of the package as well as the €110 billion in aid offered to Greece earlier this month. Deutsche Bank head Josef Ackermann last week expressed doubts that Greece would ever be able to pay back aid received, German central bank boss Axel Weber, who sits on the ECB board, criticized the ECB's decision to buy Greek bonds, and Jürgen Stark, the ECB's head economist, said on Sunday that the €750 billion package did little more than buy time.

Chancellor Angela Merkel echoed Stark's assertion on Sunday and said that the measures agreed on last week were just a first step. "The real problem" she said in an interview with the Süddeutsche Zeitung, "are the particularly high budget deficits in European Union countries."

The criticism coming from Germany has not sat well with many in the EU as finance ministers try to hammer out the final details of the package on Tuesday. In response to the comments, Juncker said on Monday: "In my opinion, certain people would do better to think before they speak ... sometimes they would do better to keep their mouths shut." Later, he stressed that his comments were not directed at Merkel.

Criticism of Merkel

Belgian Prime Minister Yves Leterme had no such qualms. "We finalized an agreement to defend the euro," he said. "We cannot, like Madame Merkel, call into question its feasibility."

In addition to hedge fund regulations and the financial transaction tax, finance ministers were also set to examine the possibility of introducing stricter rules regarding budget deficits in European Union countries. The Maastricht criteria, which have regulated the euro until now, include an upper limit on budget deficits equal to 3 percent of gross domestic product. That rule, however, has not been strictly enforced and has proven ineffective.

cgh -- with wire reports