IF YOU want a perfect example of politicians making populist gestures above sensible policy, look no further than the EU’s plans to cap banker’s bonuses that were announced on Wednesday.
The proposal will cap the maximum payout to the equivalent of a year’s salary (which could increase to two years’ salary with shareholder approval). It is part of a package of measures that, in the words of Othmar Karas, the European Parliament’s chief negotiator on the proposals, will make banks “more resistant to crises.”
For under-fire EU policymakers, the idea must seem manna-from-heaven. You don’t need to run many focus groups or surveys to realise that bankers are not the most popular bunch, possibly even more so on the continent than in the UK. The unfortunate thing for them is that the EU has got it wrong.
First, the proposals will fail on their own terms. As Boris Johnson was quick to point out, “Brussels cannot control the global market for banking talent. Brussels cannot set pay for bankers around the world.” So if bonuses are to be capped, and if UK banks are to compete successfully for talent, then banks will simply pay higher basic salaries. The result? The fixed costs of banks will be higher, meaning banks will be less able to adjust to future crises.
Second, while it is obvious that this will reduce the competitiveness of the EU as a whole, the UK will be hit particularly hard. The City is a pre-eminent financial and banking hub. Are New York, Singapore and Hong Kong considering such a measure? Of course not. Would the UK impose the same controls if it were up to us? Not at all.
And there’s a broader concern about the EU dictating pay and conditions of a particular group of private sector workers. The new proposals have been agreed by MEPs, the European Commission (EC) and EU ambassadors (hardly the most democratically accountable group). But they are a massive intrusion into what should be a private relationship between the employer and the employee. Yes, the banks had to be bailed out; and yes, banking plays an essential role in oiling the wheels of the economy, hence the multiple national and international regulations they face.
We can argue about whether the level of regulation is right in terms of liquidity, transparency and accountability. But the level of pay is a matter for directors and shareholders to decide, not remote bureaucrats and distant MEPs. Have our regulators, bureaucrats and politicians really forgotten what a private company actually is?
Rejecting the proposal looks increasingly unlikely. The Prime Minister and the chancellor have argued strongly against it, but have seemingly been out-manoeuvred. Michel Barnier, the EU commissioner responsible for the reforms, has said it is “difficult to imagine that we would scrap this compromise”. When it comes to the crunch, the UK does not even have a veto: the proposals come under qualified majority voting. And there are few European politicians who will support the UK, given the popularity of this measure with their domestic electorates.
The implications are also significant for our future relationship with the EU. If it goes to a vote, and the UK loses, it will be the first time that the UK is outvoted on a financial services issue. This would flout an informal but crucial EU convention: that states are not overruled on regulations relating to their main national industry.
Our best hope may lie in the courts. Article 153, section five of the Lisbon Treaty states that the European Parliament and the European Council’s ability to modify social policy “shall not apply to pay”. But never forget that our opt-out from the working time directive was subverted when the EC brought the measure forward (under health and safety provisions), in order to ensure that it was decided by majority voting.
A crucial UK industry is under serious attack. And there seems little we can do about it. It illustrates the UK’s vulnerability: our most important industry is about to be hit by counter-productive, populist regulations that we are powerless to stop.
This highlights the importance of the Prime Minister’s attempt to win a better deal for Britain and to repatriate powers from Brussels ahead of the mooted 2017 EU referendum. But before then, we will have to wait and see whether this acutely poll-sensitive politician will put his neck on the line for British bankers.
Tim Knox is director of the Centre for Policy Studies.