Yesterday, the Economic and Financial Affairs Council of the European Union (ECOFIN) issued a press release announcing the main actions at its meeting held earlier in the day. Among other results, council members agreed to a revised draft directive on the management of hedge funds and other alternative investment funds, aimedat:

  • introducing coordinated European Union protocols for monitoring institutions involved in hedge fund management for the purpose of controlling the risks that alternative investment fund managers (AIFM) pose to investors, counterparties, trade markets and the financial system at large; and
  • creating a unified regulatory framework allowing AIFM to distribute services throughout the EU, subject to compliance with strict rules.

Noting that the directive is the first step in regulating “major actors on the financial markets” at the European level, European Commissioner Michel Barnier said that he considered the AIFM negotiations the fulfillment of a commitment undertaken at the July 2010 G-20 summit. Admitting that negotiations in the intervening months have been lengthy and “sometimes difficult,” Commissioner Barnier asserted that the most important elements of AIFM regulation have been captured in the directive, including robust rules, greater transparency, rigorous risk management and control of leverage. The revised draft directive is intended to help conclude negotiations with the European Parliament, with the hope that the text will be ratified at first reading.

ECOFIN also reached an accord on a draft decision designed to enable certain EU Member States to more effectively address fraud in connection with value-added tax (VAT) payments on cellular telephones, integrated circuit devices, and their components. The goal is to combat particular forms of tax fraud, specifically “carousel schemes,” whereby goods are severally traded without the VAT being paid to taxing authorities. Through the application of a “reverse charge” principle, the draft decision will allow Germany, Italy, Austria and the United Kingdom to shift responsibility for the payment of VAT from suppliers (as normally required under EU rules) to customers until December 31, 2013.

The session continued with an assessment of progress made by Lithuania and Romania in bringing their government deficits below 3% of gross domestic product as required by the Treaty on the Functioning of the European Union. Council members agreed that both countries, which have been subject to enforcement procedures since July 2009, have complied with recommendations and are “making satisfactory progress in correcting their deficits.” Council members also discussed the economic and fiscal situations in Hungary and Poland, which will be followed up in December when the European Council will review the budgetary condition of all EU Member states.

In further discussions, council members took note of a joint report form the Economic Policy Committee and the European Commission concerning public spending on higher education. Council members generally supported the reported findings and determined that policy focus in the coming decade should concentrate on lowering the time and increasing the rates associated with tertiary institution graduation without lowering academic standards.

Finally, ECOFIN approved a report to the European Council on levies and taxes on financial institutions. Requested by the European Council in June, the report recognizes that a number of Member States have imposed levies to strengthen local systems. However, the structures of those levies differ from state to state, causing imbalances among banks that operate across Member States. The report therefore recommends that unified principals should be agreed upon to enable a coordinated approach to this “new crisis resolution framework for the financial industry.”

In remarks following the ECOFIN session, European Commissioner Olli Rehn emphasized the need for advanced economies to work together to restore global economic strength. Looking toward the G-20 ministerial meeting in Gyeongju, South Korea on October 21-23, Commissioner Rehn considered it essential that G-20 members work to “restore the sense of unity and, especially, pursue effective international policy coordination to rebalance global growth.”

The ECOFIN session followed the October 18th meeting of the European Council’s Task Force, at which European Council President Herman Van Rompuy announced that members “made a great step forward in the EU’s economic governance.” President Van Rompuy confirmed that the Task Force has prepared recommendations and concrete proposals concerning broader economic surveillance, greater fiscal stability, deeper implementation of the “European Semester”, a more robust framework for crisis management, and stronger public institutions designed to provide independent analysis and forecasts on domestic fiscal policy matters. The proposals are scheduled for approval by the European Council next week.