EU reforms held back by polls

SUDDENLY, the EU's economic reform is hitting heavy weather. The proposed fast-track process to create a single market in financial services is going slowly in the European Parliament. And two of Europe's most powerful governments, France and Germany, are digging in their heels on market opening measures.

First, the governments. It is old news that the French are reluctant to set a deadline for the opening up of their domestic energy markets. But now the German government has announced a draft takeover law that will make hostile bids more difficult. And Chancellor Schröder himself is threatening to veto the new Basel rules on bank capital on the grounds that they hit small businesses.

For aficionados of EU politics, such populist grandstanding in favour of domestic producer interests means only one thing: elections. France's presidentials are in May and Germany's Bundestag elections must be held by September. They may be even earlier if Schröder loses tomorrow's confidence vote to send soldiers to Afghanistan.

When two of the EU's biggest member states have imminent elections, progress of politically sensitive EU reforms tends to grind to a halt. That is not comfortable for Prime Minister Tony Blair, who badly wants successes at the Barcelona economic reform summit in March.

Germany and the German MEPs were instrumental in rejecting the EU's proposed takeover directive in July despite a decade of discussion.

Commissioner Frits Bolkestein aims to bring forward new proposals next year, but now has to contend with an intended German law that will make poison-pill and other bid defences easier. Corporate Germany did not like the Vodafone takeover of Mannesmann.

True, the proposed takeover rules will insist on some minority shareholder protection by ensuring that a full bid is launched if a buyer owns 30% of the shares. But they also allow managements to erect defences with the backing only of the supervisory board.

Just as seriously, Germany's medium-sized family companies, the so-called Mittelstand, are up in arms about the new global rules on bank capital (designed to align capital requirements with likely risk). They think they would raise the cost of bank lending.

And then there is the European Parliament. Although the Parliament has pushed through some recent reform measures, including a directive to create a single market in unit trusts, it is proving reluctant to accept the Lamfalussy proposals to create a single market.

Baron Lamfalussy wanted the Parliament and the Council of Ministers, the two legislative chambers, to delegate technical powers to a securities committee so that regulations could respond to market developments.

The problem arises due to an inconsistency in the treaties. Although the Maastricht treaty gave Parliament joint legislative power over financial services legislation, the treaties and regulations have not been changed to allow it to call back secondary regulations passed by a committee to which it delegates powers.

Parliament has asked for such changes in each of the past three treaty revisions. In order to get the financial services laws under way, the economic and monetary affairs committee has been trying to get a temporary arrangement to allow financial market liberalisation laws before the next treaty change.

A proposed deal will ensure that the treaty change is discussed, and that the parliament can insert a 'sunset clause' suspending the powers of the securities committee after four years. But it has had to be referred to the constitutional affairs committee for its view.

Pessimists think that this will hold the process up for months, and it could. But with luck and a following wind, the Lamfalussy deal could emerge by Christmas. It could even allow the two proposed directives incorporating Lamfalussy-style delegated powers (to create a single prospectus for share and bond issues, and to align rules on market abuse and insider dealing) to pass their first reading in February. After nearly a year working on this, I have to be an optimist.

Chris Huhne, Liberal Democrat MEP for South East England, is a member of the European Parliament's economic and monetary affairs committee.