As Irish Finance minister for more than seven years, Charlie McCreevy was unflinching in his efforts to foster the growth of Europe’s most dynamic economy. When European Union partners in the late ‘90s attacked Ireland’s special 10 percent tax rate for manufacturers as an unfair subsidy that was luring jobs away from other countries, McCreevy responded in 1998 by agreeing to set a uniform corporate rate of just 12.5 percent, a move that intensified tax competition within the EU rather than easing it. And in 2001, when the European Commission threatened a reprimand over his plan to cut income taxes, arguing that it would fuel inflationary pressures at a time of fast growth, he bluntly ignored the EU’s executive agency and went ahead with the cuts.
McCreevy, 55, swapped his Irish post for one with the EU as commissioner in charge of the Union’s internal market last November, but he’s lost none of his appetite for challenging the status quo. When the Italian media reported in January that Banca d’Italia had agreed formally with the government to oppose any foreign efforts to acquire Italian banks, the commissioner dashed off a letter to central bank governor Antonio Fazio demanding that he clarify his position on cross-border mergers. The right of investors to buy anywhere they want in the 25-nation EU, regardless of nationality, is a cornerstone of the single market, but Banca d’Italia’s perceived hostility had kept foreign banks at bay for years.
McCreevy’s intervention changed the atmosphere overnight, encouraging Dutch bank ABN Amro and Spain’s Banco Bilbao Vizcaya Argentaria Group to launch takeover offers for Banca Antonveneta and Banca Nazionale del Lavoro, respectively. The Antonveneta bid, in turn, set off a chain of events that have led Italian prosecutors to investigate allegations of bias by the central bank.
“It’s not my policy to decide whether there should be cross-border mergers or not,” the plainspoken McCreevy tells Institutional Investor in an interview in his Brussels office. “Personally, I think it would be good for a lower cost of capital. But my job is to ensure that there are no illegal obstacles put up to mergers between banking institutions.”
As his Italian initiative demonstrates, McCreevy has been a forceful advocate of Europe’s single market since coming to the Commission. In addition to taking on Fazio, he has lobbied U.S. authorities to get them to accept accounts prepared according to international financial reporting standards for European companies with U.S. listings. He has also set a goal of completing the EU single market for financial services by taking down national barriers, particularly to cross-border clearing and settlement of securities, retail banking and fund management. And, to the delight of bankers and securities dealers, he promises to achieve those goals through market-driven solutions wherever possible rather than by legislative fiat, a welcome change after the raft of new laws enacted during the past five years.
“McCreevy has made a very good start,” notes Richard Britton, a Zurich-based consultant on financial services regulation. “Clearly, he has a much more market-oriented agenda, probably reflecting the ‘Irish miracle,’” he says, referring to Ireland’s surge in growth since the early 1990s.
His ambitions notwithstanding, however, McCreevy will find success much more difficult to achieve in Brussels than he did in Dublin. Despite his intervention in Italy, for example, ABN Amro and BBVA have been stymied by Italian opposition. BBVA abandoned its bid for Lavoro last month after small Italian insurer Unipol amassed a blocking stake with allies. ABN Amro’s E7.6 billion ($9.2 billion) bid for Antonveneta was accepted by only 2.88 percent of shareholders last month, but the Dutch bank is refusing to throw in the towel just yet. Its hopes were bolstered late last month when Italy’s stock market regulator, Commissione Nazionale per le Società e la Borsa, or Consob, suspended a rival offer from the much smaller Banca Popolare Italiana, formerly known as Banca Popolare di Lodi. Many bankers believe Italiana has received preferential treatment from Banca d’Italia, which approved its bid despite concerns about the bank’s low capital adequacy. Consob acted after taped telephone conversations between central bank governor Fazio and Italiana’s chief executive, Gianpiero Fiorani, were leaked to the Italian media.
Europe’s single market for financial services also remains more a promise than a reality despite the passage of more than 20 EU directives over the past five years. Governments have dragged their feet in transforming directives into national law -- only five of the 25 EU member nations had adopted the prospectus directive, designed to allow issuers to tap the European capital markets with a single regulatory filing, by the July 1 deadline, a situation McCreevy has decried as “lamentable.” Many laws that are on the books still require agreement on detailed implementing of status by separate committees of EU securities, banking and insurance regulators. The delay in adopting financial services legislation, warns McCreevy, “is going to hamper the efficiency of Europe’s capital markets and the vital single passport for issuers.”
The commissioner must also contend with a hostile political environment. The defeat of the proposed EU constitution by voters in France and the Netherlands in June has left Europe’s leaders in political disarray and seemingly unable or unwilling to pursue closer economic integration.
French President Jacques Chirac blamed the defeat of the referendum in his country in part on voter apprehension over the EU’s program of economic reform and labor deregulation, adopted several years ago in Lisbon. The bogeyman of the French referendum campaign was the figure of the Polish plumber, a specter used by opponents to highlight the supposed threat to French jobs posed by low-wage workers in Central and Eastern Europe. To defuse that threat, Chirac has teamed up with German Chancellor Gerhard Schröder to oppose the EU’s proposed services directive, an initiative McCreevy inherited from predecessor Frits Bolkestein, which would enable such businesses as advertising or travel agencies to offer their services across borders just as easily as manufacturers peddle cars or computers.
The obstruction of EU economic initiatives by Chirac and Schröder “is evidence of failure of leadership at the highest level in member states. They’re repudiating the Lisbon agenda,” says Peter Sutherland, the chairman of BP and a former EU competition commissioner.
Such tactics may be understandable politically, but they carry a huge economic cost for Europe. The potential growth rate of the 12-nation euro area has slowed to just 1.6 percent annually today, compared with more than 3 percent for the U.S., the Organisation for Economic Co-operation and Development reported last month. That growth potential will slow even further, to about 1 percent, in the next two decades in the absence of serious economic reform, the OECD predicts.
McCreevy acknowledges that today’s anti-EU political climate entails risks for his liberal economic agenda, but he vows to press ahead with efforts to open up Europe’s single market. “I would hate to think that the outcome of the referendum would lead the member states and the EU to step back from much-needed economic reforms. That would be the greatest mistake,” he says.
Like many European officials, McCreevy believes economic insecurity and high unemployment fueled the “no” vote in the recent referenda at least as much as opposition to the constitution itself. He insists that the best way to generate growth and employment is to deregulate markets, open up to international trade and adopt a competitive tax regime.
“International capital flows where it gets the greatest return,” McCreevy explains. “Over the past 25 years, the countries that have done the best are the countries that have opened up their economies.”
Such a pragmatic, business-oriented approach has long been a McCreevy hallmark. A native of Sallins in county Kildare, McCreevy obtained a business degree from University College Dublin and then qualified as and worked as a chartered accountant. He won election to the Dáil, the Irish parliament, as a member of the ruling Fianna Fáil party at the age of 27.
McCreevy made his mark in the early 1980s by opposing Charles Haughey’s leadership of Fianna Fáil, which was tarnished by financial scandals, and by calling for tight budget discipline and the adoption of pro-business policies. His views, seen as radical at the time, became mainstream in 1987 when the Fine Gael government of Garrett FitzGerald negotiated a so-called social partnership agreement with unions, which imposed stiff budget cutbacks and wage restraints. That agreement sowed the seeds for Ireland’s transformation from one of Europe’s poorest countries, with a debt exceeding 100 percent of GDP, into the Celtic Tiger that today boasts the EU’s second-highest per capita income.
The lesson for Europe today is twofold, McCreevy says: Low-tax, pro-business policies can stimulate growth, but governments will only undertake painful reforms when their backs are to the wall. “We wouldn’t have achieved half of the reforms except for one thing: We peered into the abyss,” he says. “We were bankrupt in 1987, absolutely bankrupt, and we took action.” Unfortunately, he acknowledges, it’s not clear whether the economic plight of countries like France and Germany has become dire enough to force politicians to act.
In 1992 when Albert Reynolds replaced Haughey as prime minister, he named McCreevy minister for Social Welfare. “I wasn’t looking for popular people. I was looking for people with the expertise and the courage to follow through on their ideas,” Reynolds says.
Five years later, new Prime Minister Bertie Ahern tapped McCreevy to be Finance minister. One of his first challenges was to resolve an EU dispute over Ireland’s 10 percent tax rate for manufacturers, which was well below the then-standard business tax rate of 38 percent and which had lured companies like Dell and Intel Corp. to invest heavily in the country. Germany and France argued that the tax break gave Ireland an unfair advantage that allowed it to steal jobs and undermine their tax bases. McCreevy settled the issue not by raising rates on manufacturers to Continental levels, as France and Germany wanted, but by phasing in a uniform corporate tax rate of 12.5 percent. Many of the new EU members like Slovakia and Poland have followed Ireland’s example and slashed corporate tax rates to less than 20 percent.
McCreevy also cut personal income taxes by 1.2 billion Irish pounds ($1.3 billion) in 2001, which prompted the European Commission to threaten a reprimand. Far from fanning inflation, however, the tax cut supported the economy at a time when growth was easing as part of a global slowdown.
In Brussels, McCreevy has shown no hesitation in taking on the Italian establishment. Both Italian and foreign banks have chafed for years under the authority of Banca d’Italia, which supervises banks and must approve any stake larger than 5 percent. The perception that Fazio, the central bank’s governor for life, would oppose a foreign bid had deterred offers.
“It was the single most blatant challenge to the single market,” says David Woods, former head of banking at the U.K.'s Financial Services Authority. But neither Bolkestein nor his predecessor, Mario Monti, ever dared challenge the central bank’s stance.
The situation changed in January after newspapers reported that Fazio, Prime Minister Silvio Berlusconi and Finance Minister Domenico Siniscalco had met and agreed to maintain an effective 15 percent ceiling on foreign stakes in Italian banks. Those reports prompted ABN Amro’s chief executive, Rijkman Groenink, and the chairman of BBVA, Francisco González, to write to McCreevy, Commission officials say. ABN Amro was interested in building up its 12.7 percent stake in Antonveneta, a major lender in northern Italy; BBVA had been considering trying to raise its 14.75 percent stake in Lavoro, the country’s sixth-largest bank.
McCreevy was sympathetic to the foreign banks’ plight. The Commission can take legal action only if a formal complaint is filed, but the banks were reluctant to challenge Banca d’Italia openly. “The last thing you want is a bad relationship with a supervisory authority,” McCreevy notes. So he wrote to Fazio demanding that the central bank clarify its stance on foreign acquisitions, which cannot be barred, according to EU rules.
That move emboldened Groenink and González to act. On March 30, BBVA launched a E6.4 billion bid for Lavoro, and the following day ABN Amro made a E6.3 billion offer for Antonveneta. “I don’t think either one would have made the move” if McCreevy hadn’t intervened, says Vittorio Pignatti, head of European mergers and acquisitions at Lehman Brothers International in London, which is advising ABN Amro. “It took a fair amount of courage from the two banks.”
Both bids have met with determined opposition from local rivals. Banca Popolare Italiana, a small lender with a market capitalization of just E3 billion, quickly built up a stake of nearly 30 percent in Antonveneta and replaced the board, which had endorsed ABN Amro’s offer. In May, Italiana launched a counteroffer of shares, bonds and cash totaling E7.5 billion after it was ordered to bid by stock market regulator Consob, which found that Italiana had been acting in concert with allies, including Italian financier Emilio Gnutti. Prosecutors in Milan and Rome have opened investigations into Italiana’s stake-building, looking into, among other things, allegations of market rigging and issuing false documents. Prosecutors in Rome also questioned Francesco Frasca, Banca d’Italia’s top regulator, about whether he abused his position in overseeing the bank bids.
The investigation took a dramatic turn late last month when prosecutors impounded the Antonveneta shares held by Italiana and its allies, and transcripts of wiretapped conversations hinting at Banca d’Italia bias in favor of Italiana were leaked. The transcripts, according to Italian press reports, have Fazio telling Fiorani to enter the Banca d’Italia by a back door for a meeting and have the governor telling the executive that his bid had been approved before any public announcement. Fazio has made no comment, but Banca d’Italia insisted in a statement that it had acted properly. Nevertheless, the leak sparked calls for Fazio’s resignation from some politicians and the leader of the main Banca d’Italia union. The press reports also prompted Consob to suspend Italiana’s bid for 90 days, while ABN Amro managed to reinstate a friendly board at an extraordinary shareholders’ meeting at Antonveneta.
At Lavoro, meanwhile, BBVA was outfoxed by Unipol Assicurazioni, an Italian insurer that acquired a 9.99 percent stake in Lavoro to protect its interest in an insurance joint venture with the bank and then teamed up with a number of Italian allies to amass a blocking stake of 46.95 percent. Unipol intends to make an offer for the rest of Lavoro.
However the legal challenges play out at Antonveneta, the two cases highlight the need for a level playing field across the EU for foreign and domestic bidders. McCreevy has complained that while Italiana was building its stake in Antonveneta, ABN Amro was prevented from buying shares until Banca d’Italia assessed the Dutch bank’s suitability to run an Italian bank. Such delays can put foreign bidders at a disadvantage.
“ABN Amro and BBVA couldn’t have come at a better time,” says Patrick Pearson, head of the banking unit at the Commission’s Internal Market Directorate. “This is giving the Commission and member states a test case of why we need clearer rules.”
McCreevy has ordered Commission officials to draft an amendment to the EU banking directive to even the competition between foreign and domestic bidders. The amendment will include a precise list of requirements that regulators can apply to bidders and will guarantee equal treatment for foreign and domestic players. It also will seek to promote greater mutual recognition among supervisors so that a bank established in one EU country won’t face delays in bidding in another country. The banking amendment will be introduced by early 2006, and officials expect it to be adopted by the end of the year.
Although Brussels authorities express frustration over the attitude of Italian regulators, they note that Italy’s UniCredit has faced no regulatory obstruction in its E19.2 billion offer for HVB Group, Germany’s second-largest bank. That deal, coming after Spain’s Grupo Santander bought U.K. mortgage bank Abbey National for £8.9 billion ($16.4 billion) last year, suggests a growing acceptance of cross-border banking mergers in Europe. Italy’s impediments look more and more like the exception, rather than the rule.
McCreevy’s other main objective is to complete a true EU single market for financial services. Europe remains a patchwork of national markets in many sectors, particularly for retail financial services, despite all the legislation adopted since the EU launched its financial services action plan in 2000. Member states are dragging their feet in adopting EU directives, and many of the hundreds of detailed rules for implementing the directives remain to be written by EU regulatory bodies like the Committee of European Securities Regulators.
Consider the third directive on undertakings for collective investment in transferable securities, or Ucits III. The law, which was enacted in 2003 and governs E4.7 trillion in European mutual funds, was designed to broaden the range of assets in which funds can invest and make it easier for fund managers to operate on a pan-European basis. The gap between ambition and reality can be large, though. Regulators in France and Spain have drafted implementing regulations that would allow money market funds to buy only domestic commercial paper. Industry executives regard this as a blatant attempt to bolster liquidity for local companies.
“We are just appalled at the way the transposition proposals have been amended in France and Spain,” says Clifford Dammers, head of regulatory policy at the International Capital Market Association, a Zurich-based trade lobby. The association wants the Commission to throw out such restrictions before adopting final rules next year.
McCreevy says his main thrust will be to make sure that existing laws are applied properly, and he promises to repeal those that aren’t fulfilling their objectives. Any new initiatives must first undergo a rigorous regulatory impact assessment to see whether legislation would be worth the effort. “After a big raft of legislation, you clearly don’t want to bring more out unless you absolutely have to,” says Martin Power, McCreevy’s chief of staff. That stance is applauded across the EU. “The approach is very good, but no one knows yet whether in practice they will follow this line,” says Piia-Noora Kauppi, a Finnish member of the European Parliament and head of the Financial Services Forum, which brings together legislators and industry executives.
The biggest questions concern the areas McCreevy has identified as his top priorities: asset management and clearing and settlement. A Commission green paper on asset management issued last month set out several objectives, among them resolving disputes over eligible assets for Ucits funds and streamlining notification procedures to allow fund managers to market funds across borders, which can be done under the existing Ucits legislation. But it is possible that several of the fund industry’s goals, including facilitating cross-border mergers and allowing managers to pool assets from investors in several countries, may be achieved only through fresh legislation or amendments to existing laws.
“We agree with the Commission that a lot can be done without new regulation,” says Steffen Matthias, director of the European Fund and Asset Management Association, a Brussels-based trade lobby. But in the long run, he adds: “We want to have better legislation. We want to have cheaper, more flexible solutions.”
The lack of a pan-European system for clearing and settlement remains one of the biggest factors for the high cost of cross-border securities investment. An industry panel led by Alberto Giovannini, the head of Unifortune Asset Management, two years ago identified a series of obstacles to efficient cross-border clearing and settlement. The barriers range from the mundane, such as differing opening hours and public holidays in various countries, to the elemental -- for example, the lack of a common definition of a security.
The Commission is in the midst of a regulatory impact assessment of prospective legislation. Officials say McCreevy wants the market, not Brussels, to force the pace of harmonization, but so far national clearing systems have made little progress in eliminating barriers.
“There is no question, in my opinion, that some regulatory intervention will be needed,” says Giovannini. He worries that the fallout of the French and Dutch referenda on the EU constitution will continue to stall progress on streamlining cross-border clearing and settlement. “If people think that Europe is disintegrating, they will not spend a lot of money to
develop pan-European post-trading services,” he says.
That’s one more challenge for McCreevy. And one he will no doubt tackle head-on.
