This year is "crunch time" for financial services in the Europe Union. Officials at the European Commission are working flat-out to implement ambitious plans to create an integrated, continent-wide single market. The idea behind the so-called Financial Services Action Plan (FSAP) is to promote competition and efficiency across the 27 member states. A great idea; only it's unlikely to work.
Let's look at one of the main problems Brussels is trying to resolve. A cluster of "Club Med" countries, notably France, Spain and Italy, have traditionally insisted that all securities transactions must be funneled through domestic exchanges. So currently, if one wants to trade shares in a company registered on the Spanish bourse, for example, one must do so through a member of the Madrid stock exchange. One of the core pillars of the Commission's financial action plan, the seemingly innocuous acronym MiFID (Markets in Financial Instruments Directive), is designed to change that. MiFID would abolish this monopoly and enable trading in such shares to be spread between many more venues, such as platforms set up by investment banks, thereby delivering greater choice and lower fees to consumers. It would also introduce far greater transparency and consumer protection standards than has generally been the case in many EU national markets.
That's the theory. But these promised benefits may prove elusive. That's because MiFID is the product of a myriad number of political compromises hammered out between on the one side a loose coalition of member states who broadly support the concept of free markets, such as Ireland, the U.K., the Netherlands and Sweden, and the Club Med countries mentioned above who generally reject the idea.
In a deal negotiated between those two opposing blocks to adopt the MiFID directive in principle, they added no fewer than 71 optional amendments, which member states could apply at their own discretion to impose additional obligations on financial service participants beyond MiFID's minimum standards. One such amendment, for example, enables a member state to apply price transparency requirements on financial instruments other than shares, notably corporate bonds, many of which tend to be illiquid. As Bob Fuller, CEO of the about to be launched pan-European securities exchange, Equiduct, told me, "Imposing pre-trade transparency on illiquid bond markets will lead to even less liquidity." Italy, for one, appears to be quite keen to do so, and if it goes ahead, this will be the end of any hopes for a consistent implementation of MiFID.
Furthermore, there are other signs that MiFID will not be rigorously implemented in every member state. Besides t