Germany defends limit on trading

Ban on naked short selling was necessary to rein in ‘out-of-control’ markets and protect the euro, Berlin says.

The German government has strongly defended its shock decision to impose a ban on naked short selling despite criticism from other member states that the unilateral move has undermined Europe’s attempts to tame the debt crisis.

Markets plunged yesterday as investors reacted to the ban, which they fear will make it difficult for them to hedge risks in Europe. The euro yesterday fell to its lowest level against the dollar for four years, and his since been volatile. This morning, it fell 0.6% against the dollar, wiping out gains it had made yesterday afternoon.

The ban applies to naked short selling of eurozone government debt, of shares in major German financial institutions (including Allianz, Commerzbank and Deutsche Bank) and of credit default swaps on sovereign debt.

Angela Merkel, Germany’s chancellor, yesterday told the German parliament that “the euro is in danger…if we don’t deal with the danger, then the consequences for us in Europe are incalculable.”

Merkel added that Germany would not hesitate to take further unilateral action to preserve financial stability. She said the ban would stay in effect “until another solution has been found at the European level”.

Her message was echoed this morning by Wolfgang Schäuble, Germany’s finance minister. “I’m convinced the markets are out of control,” he said in an interview with the Financial Times. He said Europe needed to create a “properly functioning market mechanism”.

José Manuel Barroso, the president of the European Commission, has asked the Committee of European Securities Regulators (CESR), an advisory body for the drawing up of EU financial regulation, to examine whether the German ban should be extended to other member states.

A spokesperson for Barroso said today that the Commission wanted the CESR to examine “whether the conditions that led the German authorities to the conclusions they drew…are also relevent elsewhere in Europe”.

European co-ordination “would reinforce the actions taken nationallly,” the spokesperson said.

Michel Barnier, the European commissioner for the internal market, said: “It is important that member states act together and that we design a European regime to avoid regulatory arbitrage and fragmentation both within the EU and globally.”

He said he would put proposals on short selling up for consultation in the next few weeks, with legislation to follow in October. It is not yet clear, however, whether this will involve any kind of ban.

Germany’s ban

Sources said that Germany did not brief a meeting of eurozone finance ministers on Tuesday (18 May) about its intention to introduce the ban on short selling.

Several European countries, including France, the Netherlands and Sweden, have categorically ruled out introducing a similar ban. Italy has said that it is not planning to introduce one for the time being.

Christine Lagarde, France’s finance minister, yesterday rejected the German argument that the euro is in danger, and criticised Germany’s decision to impose the ban without consulting other member states.

“It seems to me that one ought to at least seek the advice of the other member states concerned by this measure,” she said.

The German government also yesterday took a unilateral decision to reverse its position on a financial-transactions tax. Germany had previously said that, while desireable in principle, such a tax was unrealistic, as every country would need to agree to apply it. But Merkel and Schäuble both said yesterday that they would make a concerted push for the introduction of a tax and that Europe should introduce one by itself if agreement cannot be reached at international level.

Schäuble told the Financial Times that the issue would be discussed at a summit of the G20 group of developed and emerging economies on 26-27 June, but that it was “very likely” that agreement will not be reached.

“If we get a ‘Yes’, that is good. If we get a ‘No’, then we will once again work intensively to see if we cannot have a transaction tax at European level,” Schäuble said.

Both the ban on naked short selling, and the position shift on a financial-transactions tax had been demanded by German parliamentarians in exchange for their support for a €750 billion eurozone financial support mechanism.

The EU’s governments agreed to create the mechanism on 10 May in order to calm the markets’ fears that eurozone countries might default on their debts.

The German parliament will vote tomorrow (21 May) on whether to approve Germany’s contribution of up to €150bn in financial guarantees for the mechanism.

Finance ministers will discuss the German moves, as well as details about the €750bn mechanism, at a meeting tomorrow in Brussels.

The meeting is the inaugural session of a taskforce on economic governance led by Herman Van Rompuy, the president of the European Council. Van Rompuy wants the taskforce to agree a series of reforms to strengthen economic governance, and to submit them in a report to EU leaders in October. The taskforce includes a representative of each national government (in almost all cases the country’s finance minister), as well as representatives of the European Commission and the European Central Bank (ECB).

Finance ministers from at least 25 member states are expected to attend tomorrow’s inaugeral meeting of the taskforce. Schäuble, Christine Lagarde, France’s finance minister, and George Osborne, the UK’s finance minister, are all confirmed to attend. Olli Rehn, the European commissioner for economic and monetary affairs, will represent the Commission, while Jean-Claude Trichet, the ECB’s president, will represent the central bank.

The Commission has cited the furore over the German short selling ban as evidence of the need for greater European co-ordination of financial supervision. The Commission proposed a package of draft legislation on this topic in September 2009, and it wants a swift agreement from national governments and the European Parliament. The package includes the creation of a European Securities and Markets Authority with binding powers over trading in credit default swaps and other derivatives. MEPs and ministers are at loggerheads over the legislation because the Parliament wants a greater transfer of powers to the European-level than is acceptable to governments.

Barroso’s spokesperson said that the furore was “another example of where the Council of MInisters should move to a more ambitious position…as proposed by the European Parliament”.