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No Luck For The French At Ecofin

by Ulrika Lomas, for, Brussels

10 May 2007

At Tuesday's Ecofin meeting in Brussels, European finance ministers agreed not to regulate hedge funds, but spoke in favour of a 'code of conduct' to guide their behaviour. Ministers also fired a shot across the bows of new French President Nicolas Sarkozy, giving him a first taste of the reality of life in the consensual EU.

The meeting heard ritual calls for vigilance from France, Germany and the Netherlands, but as expected the ministers said in their statement that the current approach towards regulating and monitoring hedge funds has worked well and has even enhanced resilience to systemic shocks.

Germany in particular has been pushing for greater controls over hedge funds ever since the Deutsche Boerse affair in 2005, which saw investors remove Chief Executive Werner Seifert and Chairman Rolf Breuer, leading the SPD's Franz Muentefering to compare the funds to locusts.

The Ecofin meeting will agree a 'common position' to be put to the G7 later in the month, endorsing the principle of indirect supervision, which has strong support from Charlie McCreevy, EU internal market commissioner. He has ruled out new regulation. Draft wording for the common position lays responsibility for supervision of hedge funds squarely on the private sector.

G7 finance ministers effectively kicked proposals for more hedge fund regulation into touch during the joint IMF/World Bank meetings last month in Washington. 'G7 Deputies agreed to keep the matter under further consideration,' said the G7 communique, about as close to a put-down as you get in officialese, and it is hardly likely that the upcoming G7 May meeting will take any definite steps to regulate further.

The German finance minister, Peer Steinbrück, who continues to push for action against hedge funds, will have an agenda in common with President Sarkozy, who has consistently spoken out against hedge funds. "We didn't create the euro to have capitalism without ethics or morals," said Sarkozy recently, attacking “these aggressive [hedge] funds ... that buy up a company, sell it off in pieces, sack 25% of the staff in the meantime, collect 25% profit and create zero wealth.”

Sarkozy has talked vaguely of a new tax to discourage predators, but details are vague, and a new French tax and regulatory regime installed over the last few years has seen the development of a healthy hedge fund sector in the country, with more than 100 funds and the 'wealth' requirement for investors set at a lowly Euros 10,000.

Sarkozy would also like to reclaim power over monetary policy from the European Central Bank; but most Ecofin attendees were dismissive of such plans, asserting that the current system for control of the euro and interest rates is working well. Indeed it is possible that Mr Sarkozy, who is pragmatic if nothing else, was playing the nationalist card as part of his election tactics. On verra, as they say in France (we will see).

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