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Regulation is clearly going to be a high priority for the EU in the aftermath of the economic crisis. But what form will it take and how will regulation impact the economies of member states? Leaders are rightly concerned that fear of a second downturn will force regulation, which is overly restrictive, but lessons must be learned from the financial crisis so the question will be how far should regulation go?

The impact of the recession must be reflected in any regulation that is put in place, not least to appease anger surrounding those bad practices blamed for the severity of the crash. Mark Spelman, Global Head of Strategy, Accenture explains: “The regulatory agenda will be shaped by the key imperatives for the EU to minimise the effects of the downturn and restore sustainable economic growth. The finance focus will center on the fundamentals of bank stability and getting credit to flow more evenly to big, medium and smaller companies."

Success of any regulation will depend on the support of member states and organisations feeling confident that it is implemented in a fair and transparent way. There can, of course, be skepticism, especially when regulatory measures are seen to restrict the economy's competitiveness. Mike Starkie, Former Group Vice President and Chief Accounting Officer, BP plc, explains: "There are those who take the view that the state in individual countries, or the 'European state' for the EU, has become so powerful in relation to individuals that the balance of power on which appropriate regulation depends has been permanently upset.

"There is clearly regulation which serves a useful purpose - health and safety, though one wishes there was more individual common sense in play here - product quality, advertising, competition and other areas where it is possible to see a direct link between regulation and the benefits to individuals and society as a whole. Whether such regulation is efficiently operated is another issue and experience is too diverse to make an easy judgement. In other areas the case is less clear. Banking regulation has failed and looks set to continue to do so. My own niche area of financial reporting is something of a special case - here the European Commission imposes regulation to protect the EU from some of the folly promulgated by the international standard setter," Mike continues.

George S. Yip, Dean and Professor, Rotterdam School of Management expands upon the importance of regulation around competition for organisations. He says: "Perhaps the most relevant part of EU regulation for companies is competition policy, which is getting much tougher. For example, the EU is now setting higher standards for free competition than the United States. Hence the troubles faced by Microsoft and other US companies in Europe. For European companies, the likely impact of tougher EU competition policy will be the breaking up of national fiefdoms. Companies will have to think even more about competing in an open, integrated European market."

Regulation will also need to go beyond the financial to be effective. As Goran Dandanell, Director and Head of Business Development UK, Vattenfall AB explains: "EU regulation will cost money, so regulators should be looking to go beyond only financial regulation. Improving the environment and standards of living are other things that they should be focusing on. Traditionally, EU regulation can be unpopular with older member states but welcome for most in new member states where the population of the country is more in favour of intervention from the EU. In these newer states, regulation is embraced as a way to enhance the standard of living and quality of life."

Although the limitations of the newsletter format prevent us looking at all aspects of European regulation, we have decided to focus on one industry, in this case, the energy sector, to provide an overview of how regulation is playing out beyond the financial sector.  

Finance and banking may be leading the regulation agenda but the environment, carbon emissions and energy usage will undoubtedly come a close second. Mark Spelman explains: "Copenhagen in December will mark a further step on the journey to a low carbon economy with more plans to implement on a global scale sectoral cap and trade schemes.  Business will recognise the need to adapt their business models and supply chains to the importance of carbon prices and the knock on impacts of higher power costs and changing consumer buying patterns “

Talking more specifically about initiatives that are already in place, Tony Cocker, CEO, E.ON Energy Trading SE paints a picture of what his industry sector is facing when it comes to regulation from Europe. He says: "The energy industry is faced with probably its biggest challenge ever - how to ensure secure and affordable energy supplies at the lowest possible cost to the environment. We strongly support the European Commission's view that liberalised and integrated wholesale energy markets, with their cross-commodity and multinational interdependencies, will play a central role in helping us meet this challenge. More integrated, transparent and liquid markets will steer the most efficient use of existing generation and transmission assets, and set clear price signals to attract new investment in areas such as low-carbon generation, gas storage and increased cross-border capacity.

"In recent months, the financial crisis has provoked calls for tighter regulation of energy markets on both sides of the Atlantic. But we must be careful to ensure that any new regulatory regime is appropriate to the wholesale energy markets. Financial regulation, for example, cannot adequately cover the very specific fundamental data requirements of electricity and gas production, transmission, storage, LNG and consumption. Also, while we welcome the possibilities offered by clearing and exchange trading, it's not proportionate to introduce mandatory clearing of over-the-counter (OTC) deriviates or mandatory exchange trading. We need a balance. Additional collateral requirements could mean less available cash for much-needed investment in Europe's energy infrastructure," Tony continues.

So it seems that despite the challenges we face, including the ongoing impact of the recession, Europe is on the right track. We have a number of upcoming events which touch upon some of the issues raised in this newsletter including Towards a Greener UK: Investment in Renewables or Energy Conservation and Regulation: The Consequence of Financial Failure. We also have some interesting insights on the topic of regulation including the Write-up of a past Criticaleye event, A Formula for Sustainability in a Regulated World, Preparing for International Financial Reporting Standards and The Path to High Performance: Addressing the Conflicts Between European Energy Policy Targets and Utility Industry Goals.

Please let me know if you have any comments about today's update.

I look forward to seeing you soon,

Matthew
 

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