Last week, the European Council (Council) convened for a two- day summit in Brussels to discuss certain issues related to the framework of the EU and the financial crisis. During the meeting the Council adopted a number of reports approved by the ECOFIN Council on June 9 "intended to lead to the creation of a new financial supervisory architecture with the aim of protecting the European financial system from future risks and ensuring that the mistakes of the past can never be repeated."

During the meeting, the Council assessed the status of regional and national measures taken to address the financial crisis and noted that such measures have contributed "to limiting the negative effects of the downturn and helping to safeguard jobs." In particular, the ECOFIN Council's recent report on the effectiveness of financial support schemes "underlines the extent to which state guarantees and recapitalisation operations have been crucial in preventing a meltdown of the financial sector and have played a positive role in protecting the interests of depositors. By supporting the flow of credit to the real economy they also contribute to protecting jobs."

Despite coordinated efforts at the EU level to effectively stabilize the financial markets, the Council noted that "the operating environment of the financial institutions remains challenging and credit flows continue to be constrained." While the implementation of stress test exercises will help the EU community "better assess the financial system's resilience, contribute to enhancing confidence of financial markets and facilitate coordinated policy measures at EU level," the Council emphasized that "[a]ll actions must be consistent with single-market principles, ensure a level playing field and take into account a credible exit strategy."

During the discussions at the summit, the Council acknowledged that "[s]ignificant progress has already been achieved on improving the EU's regulatory framework, in particular with the agreement reached on the Capital Requirements Directive, the Credit Rating Agencies Regulation and the Solvency II Directive." The Council also reiterated its call for "further progress to be made in the regulation of financial markets, notably on the regulation of alternative investment funds, the role and responsibilities of depositaries and on transparency and stability of derivatives markets," and emphasized that the European Commission (EC) and member states must jointly "accelerate their work and make rapid progress on countering the procyclical effects of regulatory standards, e.g. as regards capital requirements and impaired assets."

In line with the communication presented by the EC in late May and the ECOFIN Council's conclusions released earlier this month regarding the creation of "a new framework for macro- and micro-prudential supervision," the Council supports the establishment of a "European Systemic Risk Board which will monitor and assess potential threats to financial stability and, where necessary, issue risk warnings and recommendations for action and monitor their implementation." The Council also decided that members of the General Council of the ECB should be charged with the responsibility of electing the chair of the European Systemic Risk Board. The Council also supported recommendations to create a European System of Financial Supervisors, that will comprise of three new European Supervisory Authorities, "aimed at upgrading the quality and consistency of national supervision, strengthening oversight of cross border groups through the setting up of supervisory colleges and establishing a European single rule book applicable to all financial institutions in the Single Market." In response to the U.K.'s rejection of the proposed two-tier system of financial-market regulation, until additional clauses were added to ensure that the new bodies would not be able to dictate how national governments spend money, the Council, stressed " that decisions taken by the European Supervisory Authorities should not impinge in any way on the fiscal responsibilities of Member States."

Also during the meeting the EU leaders reaffirmed their commitment to see the Treaty of Lisbon enter into force by the end of 2009. The Treaty of Lisbon will seek to amend two of the EU’s core treaties; the Treaty on European Union and the Treaty establishing the European Community. The Treaty also includes several Protocols and Declarations and requires ratification by each of the 27 member states of the European Union. During the meeting the EU leaders "agreed on legal guarantees designed to respond to concerns raised by the Irish people, thus paving the way for them to be consulted again on that Treaty."