European politics may struggle to gain public attention in a year that offers a World Cup in Brazil. But the elections to the European Parliament, the appointment of a new European Commission and the selection of a new President of the European Council will prove hugely significant in 2014 and beyond.
Traditionally, interest in European elections has come from two quarters – domestic political commentators, who look for signs of voters’ intentions for the next national election, and professional Brussels-watchers, interested in the membership of a specific Parliament committee because of its potential impact on legislation.
Yet there’s a compelling case for anyone working in private equity to take the time to understand what might happen this year. Political risk factors have always had the potential to move markets – but the last five years have demonstrated to everyone the importance of action (or inaction) at the EU level.
The EU has done the most for a generation to demonstrate its relevance, creating an unprecedented new facility for sovereign bail-outs, establishing three new market supervisors with the power to draft binding rules, creating a single banking supervisor and a new regime for dealing with failing banks, and serving up an alphabet soup of sector-specific legislation, from AIFMD and CRD, to EMIR and MIFID.
It’s unlikely the next five years (the term of office for the Commission and Parliament) will be as dramatic as the last five. Even so, votes in the May European elections and the decisions of EU leaders in September and October, when governments nominate their Commissioners and the Parliament decides whether to confirm them in post, will matter.
A quick glance at the inherited agenda demonstrates that: negotiations on a trans-Atlantic free trade deal, €1 trillion of expenditure on everything from agricultural support to satellite systems, the power to block mergers and acquisitions, and the review of much of the financial regulatory agenda (a source of controversy since 2008) including the Alternative Investment Fund Managers Directive. And that’s before the new arrivals begin to formulate their own policies.
This review of AIFMD has the potential to impact significantly on private equity, determining everything from how and where fundraising can take place, through to the structure of remuneration. If the centre-left political groups come out on top in the elections, we can expect significant pressure for bank-style caps on remuneration to be introduced for asset managers.
Every transition year in Brussels brings significant changes in personnel, but 2014 is expected to be particularly significant. Between 30 percent and 50 percent of MEPs are unlikely to return, with many veterans of the Economic and Monetary Affairs Committee having already announced their departure; this creates a challenge in ensuring continuity in policy and in preserving ‘institutional memory’. Many commentators are also predicting a swing away from the centre and towards the political extremes. These new MEPs are likely to be more hostile to the EU, which could have implications for how business gets done.
The Commission will also see many new faces in key portfolios. Michel Barnier, for example, is not expected to stay in his current role supervising financial services. EU heads of state and government are now required by the Treaty to take account of the outcome of the Parliament elections in their choice of Commission President (which will have knock-on effects for who can get the other top jobs, such as High Representative for Foreign Affairs).
Working for a European-level association, one always has to guard against any tendency to overstate the significance of the EU. National governments, of course, still matter and will continue to do so. And as our economies continue on the path of globalisation and integration, international standard-setters such as the Financial Stability Board or the Basel Committee and the economic powerhouses of Asia and the Americas are likely to grow in significance.
But as policy challenges become more complex, as spill-over effects become more pronounced and as the inability of any single level of government to address all the demands of the age become more evident, we all need to get used to having a 360-degree political perspective. The EU will be part of that story, and 2014 opens an important new chapter.