Fisher Investments Editorial Staff
Developed Markets

Report from the European Trenches

By, 12/14/2012

EU Talks Banking Regulator

After EU leaders put the finishing touches on Greece’s latest, €43.7 billion aid package—agreeing to release the first tranche (of four) by next week—most attention turned to talk of a bank regulator for the single market. Following months of deliberation and negotiation, EU finance ministers announced a plan to put approximately 200 European banks under direct supervision of the ECB by March 2014.

The creation of a banking regulator was a condition for Germany’s agreement to allow the ESM to directly recapitalize banks without channeling it through a host government first—an important consideration for Spain’s ailing cajas, or regional banks. As with many of the changes happening in Europe today, negotiations for a single banking regulator were highly contentious and rankled the ire of many, including German politicians, who feared backlash from conceding authority over Germany’s banks to Brussels. In London, there was fear of encroachment onto its large banking sector.

However, under the rough terms agreed to Thursday, an EU bank would become subject to ECB oversight only when it reached €30 billion in assets or its balance sheet grew to more than 20% its home-country’s total economic output. That means no real change for Germany’s many local savings and co-operative banks (along with many other European Financials). And the UK and other countries (like Sweden) won important opt-outs, seemingly sheltering their financial centers from ECB governance.

Should the proposal be agreed to and become law (the European Parliament must still approve), the ECB would have until March 1, 2014 or 12 months from the passage of the legislation (whichever is sooner) to develop the legal framework for its regulatory duties. And myriad details on the ECBs duties and how regulation will be applied to the EU’s many banks remain to be figured out. Whether this spurs tighter integration in other aspects of broad EU governance is to be seen. But that European officials were able to reach an agreement wherein they tailored solutions to meet countries’ varying concerns is certainly telling and worth watching for in future negotiations.

Brits Get Fracking

The UK Department of Energy and Climate Change (DECC) announced the government will lift a moratorium on exploratory hydraulic fracking. Exploratory fracking in the UK had been suspended since May 2011 when two small seismic tremors were detected near the country’s (then) only fracking operation. In April this year, a DECC-commissioned report concluded fracking was the likely cause of the (really, very tiny) earthquakes, but with sufficient precautions, future risks could be mitigated given fracking’s enormous potential. It’s estimated there could be enough shale gas in the UK to meet the country’s total demand for two to seven years.

Following the April report, the DECC opened up a public comment period, during which other countries’ stances on fracking have materially diverged. Poland—currently highly dependent on Russian coal and oil—took a number of procedural steps to embrace fracking. Although the country isn’t projected to produce commercially available shale gas until about 2014, the country has western Europe’s largest reserves of shale gas according to the DoE. There remain some hurdles, such as a lack of clarity regarding Polish mineral rights and property protections, but the potential seems to be there. Meanwhile, France, with the second largest reserves in western Europe, passed a law banning fracking, citing potential harm to water tables and health concerns. (C’est la vie.) The US and Canada, however, continue to push forward. Although several US states have issued their own moratoriums on fracking until additional studies are completed, and the US has yet to issue an edict on fracking on federal lands, the IEA predicts the US will become the world’s top producer of natural gas in 2015 and oil in 2017.

Without question, energy exploration can carry risks (though they’re often overstated). But profit-hungry businesses should be motivated to manage risk as much as they can. It seems the fracking revolution, overall and on average, continues.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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