EU member states hammered out a compromise deal on Wednesday (2 December) that will see three new European supervisory authorities watch over the region's financial sector.
In a bid for greater pan-European oversight, authorities in the banking, insurance and securities sectors will be set up in London, Paris, and Frankfurt.
The decision – coming after five hours of laborious negotiation – is an important part of the EU's response to the financial crisis that saw the region plunged into its worst recession since World War II.
Finance ministers meeting in Brussels agreed on a complex appeals mechanism as part of the political accord, designed to assuage UK fears that the new bodies could overly infringe on areas of national sovereignty.
The day-to-day regulation of banks and other financial institutions will remain with national regulators, while the three new authorities will arbitrate in disputes between national regulators and help create a 'common rulebook' for EU financial institutions.
No sooner had the historic deal been struck however than the heads of the four largest political groupings in the European Parliament issued a joint statement saying Europe's efforts to overhaul its supervisory system are "going in the wrong direction."
MEPs have just begun examining the issue and are likely to express concerns to the Spanish EU presidency, scheduled to start in January, that European Commission proposals published in September have been overly watered down.
Despite this, diplomats hope an agreement between member states and the parliament can be reached around the middle of next year, enabling the three new authorities and a new overarching risk board to be up and running by the end of 2010.
Finance ministers reached an agreement on the European Systemic Risk Board – designed to complement the work of the three authorities – at a meeting in October. It will monitor the European economy for major threats such as the build up of bubbles.
The fall of US investment bank Lehman Brothers last September saw EU governments, and in particular France, call for an improved system of financial supervision within the union.
But UK fears it could be forced to bail out a troubled bank against its will had dogged discussion on the new authorities until Wednesday. London is Europe's largest financial centre, and therefore the most likely to be called upon to mount an expensive bank rescue.
Under the compromise deal, which left both the UK and France claiming satisfaction, a complex appeals system has been devised enabling member states to challenge decisions made by the three authorities.
During a future "financial crisis" – a status to be decided by member states and not the commission as originally proposed – member states will be able to challenge the decisions of any of the new EU supervisory bodies at the monthly meeting of EU finance ministers.
A simple majority of member states, in practice 14, is then needed by the appealing government to permanently scrap the authority's decision. Commission proposals had suggested a qualified majority would be needed.
If unable to get the simple majority amongst finance ministers, the appealing country may send the issue to the European Council of EU leaders to decide by consensus.
British Chancellor of the Exchequer Alistair Darling claimed after the meeting that the deal gave Britain an effective veto. "The primary responsibility for regulation rests fairly and squarely with national regulators – and nothing today has changed that," he said.
In non-crisis circumstances, governments can appeal an authority decision to EU finance ministers, but here a simple majority of member states is needed to uphold the authority decision.
French finance minister Christine Lagarde also hailed the compromise deal. "We're in the process of creating a real European authority," she told journalists.
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