The European Union agreed to create new financial oversight institutions Tuesday, hoping to prevent a repeat of the government debt crisis that nearly left Greece bankrupt and brought the European banking system to its knees.
The union's 27 finance ministers — the so-called Ecofin — decided to establish a new supervisory board over the financial industry and demand a more transparent sharing of government budgetary information.
The move still needs the formal backing of the European Parliament, but that is expected later this month.
However, the finance ministers failed to agree on the introduction of a levy on banks or on a new tax on financial trading.
Belgium's finance minister Didier Reynders, who chaired the meeting, said stricter supervision was one of the most important lessons from the government debt crisis and insisted the deal was necessary now to make sure the new oversight structure begins work at the start of 2011.
Although many countries in the EU have decided to impose a levy on bank profits, there is no Europe-wide agreement about what to do with the proceeds. Germany wants the revenues to be put in a rescue fund to pay for future banking bailouts while Britain wants to use the money for its own budgetary needs.
"I made it clear ... that we did not support proposals for a European resolution fund," said British Finance Minister George Osborne.
The transactions tax, which has been backed by non-governmental organizations, trade unions and politicians, does not look like it's going to get the broad backing within Europe's capitals, even though French President Nicolas Sarkozy said it's going to be a priority when France takes the chair of the Group of 20 countries next year.
Osborne said the problem with the trading tax is the same as it has been since Nobel Laureate James Tobin first proposed it in 1970s — if it's not introduced everywhere, then firms will just move their dealmaking elsewhere to avoid paying the tax.
"I suspect that transaction taxes will be discussed for many decades to come," said Osborne.
Proponents of the measures say they will curb excessive risk-taking and place the financial burden of any rescue package on financial institutions themselves instead of the taxpayer. During the financial crisis, governments across the EU provided financial institutions public support worth an astonishing 16.5 percent of the union's total worth.
Worries about the European economy and its ability to deal with large amounts of government debt have been eased recently by a run of better-than-expected data, progress by Greece in strengthening its bailed-out finances and the results of stress tests on 91 of the EU's banks.
The most apocalyptic scenarios openly discussed a few months ago, such as the collapse of the euro currency, have been put on the back burner.
But policymakers remain wary that the government debt crisis could flare up again, particularly as the 16 governments that use the euro are set to issue more debt this month than they did in August.
Eurozone governments have bond repayments of 80 billion euros ($103 billion) in September, with around 30 billion euros ($38 billion) due from Italy alone — and the results of the debt sales will reveal what bond investors think of government finances.
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