EUROPE: TIME TO RETHINK 'WILD WEST CAPITALISM'

by David Cronin

(IPS) BRUSSELS -- The turmoil in the financial markets and the resulting slump in the global economy has highlighted the stark inequality in the European Union.

At one end of the spectrum, chief executives in France saw their pay packets swelling by almost 60 percent last year so that it often exceeds six million euros (nine million dollars) per annum.

At the other end, some 43 million EU citizens are at risk of what social policy analysts describe as food poverty: being unable to afford a meal containing essential protein every second day. It might seem like an opportune time, then, to introduce robust regulation throughout the Union in order to prevent careless behavior in the financial sector.

Nicolas Sarkozy, the French leader whose country holds the EU's rotating presidency, said this week that the system under which the world's markets have been run has been "crazy" for many years. In particular, he took a swipe at the agencies tasked with giving credit ratings; these have been reprimanded by France, Germany and the European Commission for being too slow to warn investors of risks that they faced ahead of the sub-prime crisis that gripped the U.S. housing market during 2007.

"Let us build a capitalism where ratings agencies will be subject to controls and punished when necessary, where transparency of transactions will replace opaqueness," Sarkozy told the United Nations general assembly in New York. "The opaqueness is such today that we have difficulty understanding even what is happening."

Not every senior EU figure is convinced of the need for greater regulation, however.

Charlie McCreevy, the European commissioner tasked with overseeing how the Union's single market operates, has opted for a hands-off approach towards hedge funds. These private investment funds have been used by wealthy individuals to make vast profits through speculation. Among their more controversial practices is short selling, under which a share borrowed from a company is sold in the hope it can be repurchased at a lower price.

Although hedge funds wield considerable influence over markets, they are not regulated in the way that other financial institutions such as banks are. When Germany used its chairmanship of the Group of Eight (G8) top industrialized countries last year to recommend that the running of hedge funds should be made transparent, Britain and the U.S. opposed the move.

McCreevy claimed this week that hedge funds play a largely positive role. "I don't believe it is necessary at this stage to tar hedge funds and private equity with the same brush as we use for the regulated sector," he said, claiming that conventional banks are more blameworthy for the problems of the international finance system. "Let me be clear: The EU economy is going to need massive investment in the time ahead. Without sovereign wealth funds, private equity and the like, Europe's recovery from today's turmoil will be all the slower."

Some members of the European Parliament (MEPs) were severely critical of McCreevy's comments.

Proinsias de Rossa, an MEP with Ireland's Labor Party, cited the example of John Paulson, the billionaire who operated the most successful hedge fund in the U.S. last year by betting against sub-prime mortgages that subsequently turned toxic. This week it emerged that Paulson has also been short-selling British banks, by placing an 800 million pound ($1.5 billion) bet that their share prices would plummet.

De Rossa argued that if McCreevy refused to recognize the harm caused by such activities to the economy, he should be "forced to step aside."

Hedge funds, de Rossa added, "should not be pick-pocketing pension funds, savings and jobs. The so-called invisible hand of the market is in fact a pick-pocket and the more invisible it is, the more pockets it picks."

Francis Wurtz, a French left-wing MEP, said that recent events illustrate why Europe should endorse calls from the Brazilian President Luis Inacio Lula da Silva for an international tax on capital flows.

According to Wurtz, Europe's finance ministers "have to get out of their ivory towers and look at what is happening to ordinary people, who are suffering for the benefit of speculators.

"In supporting markets, they (ministers) are reducing peoples and societies to despair," Wurtz added.

Martin Schulz, head of the Socialist grouping in the Parliament, said it is vital to "decouple City bonuses from short-term speculative profits" as the recession that hedge funds can spark will lead to higher unemployment.

"Wild West capitalism in financial markets is threatening whole economies," said Schulz. "What we are seeing at the moment is not just the bankruptcy of some financial institutions, it is the bankruptcy of an economic philosophy. For years, we were told that only capitalism could generate growth. That is the system that is going bankrupt now."