Now that financial institutions are being subsidised by taxpayers and speculative trading is back to pre-crisis levels, breaking the economic boom-and-bust cycles should become a high priority for the European trade union movement. This needs to be underpinned by broad coalition-building, campaigns and targeted lobby work in member states.

Rahm Emanuel, White House chief-of-staff, after his nomination by then president-elect Barack Obama in November 2008, famously said “You never want to let a serious crisis go to waste”. A widely held belief in the political spectrum spanning from the centre-left to value-oriented conservatives has been that this crisis would finally open a window of opportunity to eradicate the neo-liberal doctrine once and for all. Only a year and a half after the collapse of Lehmann Brothers and the ensuing credit freeze that brought the global financial system to the brink of collapse on 15 September 2008, however, most governments conspicuously seem to believe that the crisis is almost over, that it is time to prepare for the ‘exit’ and bring public finances back into order. Hence the question arises: is the crisis over and we wasted it? The policy agenda for financial reform adopted by trade unions in Europe and beyond is indeed far from having been completed.

Policymakers, with the mutual consent of business and trade unions, gave top priority to the immediate stabilisation of the global financial system. At first, it seemed that the historical lessons of the Great Depression of the 1930s had been learned: the pace of return to previous levels of wealth depended on the repair of financial sector damage and the closure of the casino, without which such levels would remain subdued. Yet the price to be paid for this has been high: according to the IMF, the total cost of the financial crisis will amount to an astronomic figure of $12 trillion, representing a fifth of annual world output, and, as a result of short-term interventions from governments and central banks, countries of the G20 face the biggest budget deficit since World War II.

Although governments of the G20 and within Europe have sought to work towards a common approach to financial regulation, there is now a risk that the momentum for financial reform will slowly fade away, while concrete and bold measures are still awaited. The risk is that the policy failures that were the source of the financial crisis will be perpetuated through the next boom-and-bust cycles. Now that global financial conglomerates are being subsidised by taxpayers and global speculative trading is back to pre-crisis levels, breaking the economic “doom loop” should become a high priority for the European and international trade union movement.

Within the EU, the de Larosière report, issued in February 2009, put forward a number of proposals for financial regulation. These were then weakened by the Commission by means of subsequent legislative initiatives. Worse than this, if anything, has been the behaviour of the Council which has sought to substantially water down the proposals for a regulatory package for a European system of financial supervision and for a directive on alternative investment fund managers (AIFM), an instrument designed to regulate the shadow banking system of hedge funds and private equity funds. The European Trade Union Confederation (ETUC) regards as highly significant the European Parliament’s moves to strengthen the terms of these draft legislative acts and to establish a genuine European supervisory authority for banks, securities and markets as well as for insurance and occupational pensions. Proposals issued relate, inter alia, to direct supra-national supervision of big cross-border financial institutions, the authority to ban trading of certain products, and the creation of a European Fund – financed by financial institutions – to protect depositors. Only a truly European approach to supervision endowed with executive power can prove effective in counteracting regulatory arbitrage.

However, the outcome of the European Parliament debate on an effective regulation of AIFM is far from certain. With huge amounts of money in their back, massive lobbying from the financial services sector has resulted in the EP rapporteur receiving almost 1700 proposals for amendment to his draft report. The ETUC and its affiliated unions cannot counter this solely by relying on the superior quality of their arguments. In other words, the effort to influence the legislative process in and alongside the European institutions in Brussels is not sufficient but needs to be underpinned by campaigns and targeted lobbying work in member states. One potentially useful platform to this end could be the “Regulate Global Finance Now” campaign that was launched in autumn 2009 by the Global Progressive Forum, together with the ETUC, International Trade Union Confederation (ITUC), UNI Global Union, Solidar, the Global Progressive Youth Forum and the Foundation for European Progressive Studies, and joined by the European Green Party, national trade union organisations, notably IG Metall, and NGOs.

Trade unions across Europe will also have to embark on broader coalition-building when it comes to the agenda of downsizing the financial sector and a reversal of the “quiet coup” (Simon Johnson) staged by the financial oligarchy and which is blocking essential reform. At best, such a coalition would span interests that are social and political as well as economic such as SMEs or savings and mutual banks. While it has become common practice among policymakers across Europe and the industrialised G20 countries to emphasise that big banks will have to pay their fair share of the burden, there is no agreement on which measure(s) to apply and how to avoid tax, in other words, on ‘burden sharing’ arbitration among the key financial centres. As a key part of the agenda of ensuring that finance is socially useful – discussed also by other contributors to Part 1 of this volume – it is essential to tackle the problem of “Too Big To Fail”, or, as Joseph Stiglitz put it, “Too Big To Live”. This will require, if it is to be successful, a broad debate in our societies on the central question of ‘WHO PAYS’, a debate that should be placed in a threefold context:

1. Reimbursement of the state aids to banks during the crisis bail-out;
2. Compensation for the social losses incurred so far; and
3. Use of EU competition and anti-trust law, and building ‘Chinese walls’, to prevent financial crises in the future.

Special tax rates on bonuses, levies on financial institutions to compensate for the bail-out costs, a Europe-wide or global Financial Transaction Tax to dampen speculative trading, as well as an EU-wide mandatory insurance fund, constitute distinct measures that, in combination, would be mutually enforcing and lead the way to structural adjustment of the financial sector.

The US debate on splitting financial conglomerates along the lines of the Volcker rules has not yet begun at EU level. Yet a functional separation between investment banking branches and commercial and retail banking is vital and no deposit-taking bank should be allowed to engage in proprietary trading. The aim, in other words, is to let the gamblers gamble on as they please, but at their own risk and without taking society as hostage. Caps on the size of individual financial institutions should be set using their size relative to GDP as an indicator. Volcker’s proposal to limit their size relative to total liabilities would, on the other hand, not prove ‘bubble-proof’ as long as relative prices in the real economy (e.g. for housing) vary markedly, thus influencing the value of nominal assets and liabilities.

Finally, broad coalition-building among trade unions and civil society organisations for financial reform would also challenge the closed-shop mentality of the financial elites and shed light on the opacity of their business practices and institutions on a wide range of issues, be it non-standardised over-the-counter trading of derivatives, international tax arbitrage or the oligopolistic structure of the credit-rating agencies. Opposing democratic governance to financial oligopolies would reflect Franklin D. Roosevelt’s famous phrase that “government by organised money is just as dangerous as government by organised mob.”

Further reading
Alessandri, P. and A.G. Haldane (2009), Banking on the State, London: Bank of England.
ETUC (2009), EU policy towards financial market regulation, October 2009.
Europeans for Financial Reform (2009), Our call to action: regulate global finance now!.
Johnson, S. (2009), ‘The Quiet Coup’, The Atlantic, May 2009.
Stiglitz, J.E. (2009), Too big to live, Prague: Project syndicate.

This article is part of the book ‘After the crisis: towards a sustainable growth model‘, edited by Andrew Watt (ETUI) and Andreas Botsch (ETUI/ETUC) and published by the European Trade Union Institute (ETUI).