Britain's Osborne faces EU baptism of fire over hedge funds

18th May 2010, Comments 0 comments

Britain's new finance minister George Osborne confronted EU nations for the first time on Tuesday, facing instant defeat on hedge fund curbs and a bid by Brussels to clip its huge deficit.

The Conservative minister was in damage limitation mode as he held one-on-one talks with Spanish Socialist counterpart Elena Salgado, who is pushing for tough restrictions on high-risk investment vehicles.

The proposals as they stand would force the 80 percent of Europe's hedge fund industry that is based in London to seek new regulatory approval in each of the other 26 EU countries unless a compromise 'passport' system is agreed.

A bid to ram through the change, which the United States has accused of being protectionist, was dropped in March when EU nations gave the last British government a pre-election reprieve.

But European partners warned Britain's new chancellor of the exchequer that if he wants to make his way in Brussels he will have to accept the majority will on hedge funds -- a totemic issue for euro governments tired of what they call "speculators" attacks on their currency.

"I think that Britain will understand," said German Finance Minister Wolfgang Schaeuble ahead of the move on the trillion-dollar hedge fund industry, whose top earners can pocket billions.

"That's how it is in Europe. We are a union, and there are decisions that go against individual countries, but that can happen to any one country.

"However, if we want Europe -- and we do want Europe -- then we also have to be able to take decisions.

"A clear majority want this law to go through and consider it necessary," Schaeuble underlined.

Britain wants funds based in Commonwealth outposts in the Caribbean, for example, but managed in the City of London, to be able to sell to all of Europe's half-a-billion population on the strength of British regulations alone.

That is the current state of the game, but Osborne's entourage admits that the move to clamp down on an industry blamed at least in part for exacerbating the global financial crisis of 2009 is too far advanced to be stopped.

His meeting with Salgado, which followed a vote in the European Parliament on Monday that moved towards Britain's stance, was aimed at getting the Spanish EU chair to acknowledge calls for the financial passports ahead of negotiations on the final legislative text due on May 31.

British hedge fund managers -- backed by US Treasury Secretary Tim Geithner -- argue that the new directive will cost millions of pounds in fees and could lead to an industry exodus to Switzerland and the Middle East.

Luxembourg's Luc Frieden said that EU counterparts "have to listen to our new British colleague and come closer" but also insisted that "we have said for months we want to regulate all financial products."

Hedge funds lost some of their lustre during the economic downturn, but still handled between 1.2 trillion and 1.3 trillion dollars worldwide in 2009, compared to two trillion dollars before the crisis emerged in 2008.

The ministers were also to address controversial plans for Brussels to vet budgets in all 27 EU countries from next year before they are put to national parliaments.

Eurozone finance chief, Luxembourg Prime Minister Jean-Claude Juncker, firmly backed the bid on Monday, saying: "The commission is not going to become the school headmistress for member states' budgetary policies."

But a European diplomat warned that Osborne would mount strong British opposition to the idea on Tuesday, and again when EU president Herman Van Rompuy gathers a special task force to look at the question on Friday.

Under a power-sharing agreement struck by the Conservatives with the pro-Europe Liberal Democrat party, any further transfer of powers from Britain to Europe has to be approved by a referendum.

With a deficit currently at 12.7 percent of British output, Osborne said on Monday that Britain will announce cuts worth six billion pounds (8.7 billion dollars, seven billion euros) this year in a June 22 emergency budget.

The EU has said Britain will have Europe's biggest deficit in 2011.

© 2010 AFP

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