Don’t Be a Regulatory Neigh-Sayer

Europe has again been rocked by a crisis.

The problem was first diagnosed in Ireland in January, but it very soon became clear that its tentacles extend to Britain, France, the Netherlands, Luxembourg, Sweden, Romania, and Cyprus.

What is this latest catastrophe?  Why, the great European horsemeat scandal of 2013, of course.

News of the scandal first became public when Irish authorities announced that they found horse meat in some beef burger products sold in British supermarket chains.  It was discovered subsequently that horsemeat had found its way into a variety of frozen food products, including moussaka, beef lasagna, and spaghetti Bolognese.

Europeans are up in arms, quite rightly, for having purchased one product and being fed another.

The British are doubly horrified because, in addition to their disgust at being fooled, they are inordinately fond of horses and the notion of consuming them has led to national revulsion.

The explanation most commonly given for the horsemeat scandal is the long and winding supply chain involved in the meat processing business.  Newspaper accounts detail the complex route that the horsemeat took from a slaughterhouse in Romania, via agents in the Netherlands and Cyprus, to a French-owned processing plant in Luxembourg, which produced the finished product for a Swedish-owned company.

These stories frequently highlight the complex networks through which meat travels internationally and the presence—or absence—of government controls over those international transactions.

And they should make us think about another area of commerce in which international transactions take place with insufficient regulatory oversight, namely, finance.

Consider the following excerpt from a recent article in the Wall Street Journal about the horsemeat scandal:

“The furor has raised concerns about the complex network of slaughterhouses and suppliers that handle food on its way to the dinner table and the controls governing food transported across borders.”

Replace “slaughterhouses and suppliers” with “banks” and “food” with “money” and the story could easily be from the financial pages.

Given the complexity of the meat supply chain, the best way to protect the meat supply is with Europe-wide regulation and supervision.

The same can be said for banking.

And, in fact, the Europeans have made a good start toward safeguarding their financial institutions.  In December, the European Union began the process of creating a banking union by making the European Central Bank the main banking supervisor and giving it the authority to enforce a common rule book for European banks.

More needs to be done to shore up European banking, of course.  The common rulebook must be finalized.  Money must be raised to fully fund the European Stability Mechanism, the European Union’s bailout facility.  The proposed Europe-wide deposit insurance fund needs to be firmly established.  And European banks need to raise money so they do not fail in large numbers the next time the economy slows.

Despite this long “to-do” list, the December agreement was a step in the right direction.

The horsemeat scandal reminds us of the importance of effective government regulation—both in the US and in Europe–and in particular of the importance of such regulation when the activity that is being regulated is multinational and complex.

We shouldn’t horse around with financial stability.

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