A misguided cap on Bankers’ bonuses

Alexander Pannett 3.30pm

And so they are marching again. The restless European Parliament is finally getting its revenge against the unscrupulous “Anglo-Saxon” capitalists in London. It has voted to reign in bankers’ bonuses, reducing permitted amounts to the base salary of bankers.

The rules would apply to Europe-based employees of any bank, as well as to staff of European banks wherever they are located. That means a Barclays trader working in New York would be subject to the cap, as would a Goldman Sachs banker based in London.

I am sceptical of the bonus cap’s effectiveness. The reduction of bonuses will mean that remuneration will be granted in the form of higher salaries.  This adds inflexible costs to financial institutions which, in a crisis, will have to reduce head-count rather than being able to cancel bonuses in order to preserve capital levels. It will lead to the increased use of temporary contracts as banks seek to maintain flexibility.

Increased salaries, rather than bonuses, also moves the City away from performance related pay. Bankers will receive salaries despite the poor risks and mistakes they make. Failure will be rewarded. This is also unnecessary as recent claw-back regulations have been introduced which are designed to ensure remuneration is performance linked. Bankers whose trades made losses in the long-term would see their bonuses reclaimed, which incentivises bankers to consider long-term risks. Higher salaries do not ensure that bankers mitigate risks.

I also have an intrinsic revulsion at politicians who interfere with business for political or even emotive reasons. Do these politicians understand or even care about the effect that these changes will have on London’s financial services, which is a considerable European strategic asset? I suspect they do not.

Despite my above concerns, we must not ignore the considerable antipathy that the British public holds for the financial sector. It is almost satirical that RBS, which was saved with taxpayer’s money, has posted 2012 losses of more than £5 billion whilst paying out £600 million in bonuses last year. This European cap on bonuses may be mis-guided but that does not mean the City now smells of roses.

A reform of the bonus culture may indeed be needed, such as substituting locked-in equity for current bonus structures or changing the criteria for awarding bonuses so that they are more strongly linked to the overall performance of a financial institution. However, this European cap on bonuses is not helpful and will be counter-productive as it harms the international competitiveness of one of Europe’s few remaining engines of economic growth. The prime minister is right to resist.

Follow Alexander on Twitter @alpannett

European Parliament must find a bigger voice amidst the chaos

Nik Darlington 11.08am

The European Parliament is vast, its shiny superstructure reflecting the functional surroundings of Brussels back on itself. Yet when the citizens of Europe glance proverbially in its direction, it is not a reflection of themselves that they see - a reflection of their current plight - but a remote and faceless edifice.

However once inside, the Parliament shows itself for what it is. Or at least it offers a glimpse of what it could be.

Much happens here, but few follow it, fewer truly understand it, and even fewer, maybe, genuinely care about it. Whatever one’s views about the European Union, this is something to be regretted.

What we think of as the “European Union” is in fact a smorgasbord of not always complementary (nor complimentary) institutions.

Briefly, the Council consists of ministers passing laws, coordinating policies, and generally representing individual governments depending on the subject matter (e.g. agriculture or transport). Note that this is not the European Council we read of David Cameron attending with other heads of government. That irregular grouping sets the EU’s political direction and has no power to make laws.

The European Commission comprises nominees from individual member states who are assigned a portfolio (Lord Mandelson was a trade commissioner, for instance), and represent the interests of the EU as a whole.

Then there is the European Parliament, a body of more than 700 directly elected representatives from throughout the EU. Members (MEPs) serve Europe’s citizens in a similar way to how our MPs operate in Westminster - in essence holding the executive to account, scrutinising legislation, acting on behalf of constituents, and voting on new laws. MEPs typically stand for office as candidates of traditional political parties - e.g. the Conservatives, Labour, or France’s UMP - which subsequently coalesce with other European parties under like-minded umbrella labels.

As Europe lurches from one crisis to another, I believe it is the European Parliament that has to take the lead.

At a seminar for senior editors yesterday in Brussels, an Italian socialist MEP, Roberto Gualtieri, said: “Non è una problema economica, non è una problema tecnocratica, ma è una problema democratica”. Europe is on the brink because it is suffering a crisis of democracy, above all else. While Rome, Athens, or elsewhere burns, unaccountable placemen fiddle at the fringes. Or so the narrative goes.

The response of Europe’s leaders has been politically anaemic and economically heavy-handed. Throughout the continent in recent years, failed governments have been thrown out by voters. Largely in favour of rightist or centre-right alternatives, although the Left’s renewal is gaining traction. And while politicians have scarcely been so reviled, the political process has scarcely so mattered.

At the same time, euroscepticism has probably never been as strong. And not only in Britain. Why? Because at a time of public frustration, citizens are demanding a greater voice - maybe not their voice, necessarily, but a voice that represents their hopes and fears. The European Union, however, is seen to be inimical to that visceral democratic desire.

It needn’t be. A more self-confident and, crucially, better understood European Parliament can be that voice. Its members do, after all, have a democratic mandate. Of course, European elections in Britain typically attract few voters, but apathy is as much the fault of the electors as the elected.

The European Parliament also has, in the experienced German politician Martin Schulz, a president (akin to the Speaker of the House of Commons but with more political power) with strong opinions about the current crisis, and opinions that diverge from the inflexibly austere forces that have led the EU’s response to date. Brussels sources point out that President Schulz’s strong opinions are not weakly held, not shall they be meekly guarded.

In Britain, the public seems to prize that certain sort of parliamentarian who stands tall, is independent and speaks out “for the people”. Europe’s problems are indeed largely economic, but the solutions must be political. And those solutions must be seen to be legitimate in the eyes of Europeans.

There is only one European institution that can achieve this, and therein lies the European Parliament’s unenviable, but also unmissable, opportunity. And, some might add, its duty.

Follow Nik on Twitter @NikDarlington