It is astonishing that the European Commission is responding to the European sovereign debt crisis by proposing to regulate credit rating agencies. Its proposals, leaked in Brussels, include silencing the rating agencies – such as Standard & Poor and Moody’s – in exceptional circumstances. I don’t think those circumstances will include those where the rating agencies are saying governments are solvent, but the governments themselves are insisting they aren’t.
This plan to muzzle the rating agencies is troubling for a number of reasons, and highlights much that is flawed about the EU’s approach. For a start, it is obviously an attempt to shoot the messenger. It is similar to someone who is failing to lose weight blaming the scales for not telling the truth, or a drunk driver blaming the breathalyser. Don’t like how you look in the mirror? Simple – just smash the mirror up with a hammer. Attempting to silence critics or harbingers of bad news has been the approach of dictators through the centuries. There are serious issues around free speech – what right does the EU have to tell a company it can’t publish its own research, or circulate it amongst its clients? It also leads to bad policy making: it is clearly better to put out a fire than to switch off the fire alarm and pretend all is well. Silencing the alarm bells of credit rating agencies will encourage governments to think they can live beyond their means, but will also push up the cost of borrowing in Europe. By making the risks less visible, they clearly make EU governments riskier to lend to, which will push up bond yields. The EU shouldn’t be targeting the credit rating agencies, it should be targeting the cause of the crisis.
There is a wider point here, which is ultimately the most worrying. It is highly unlikely that European leaders will blame themselves, or their inherently flawed policies for the euro crisis – they will do everything they can to shift the blame onto someone else. Greece is obviously a prime target, but as the contagion spreads they will search for a wider scapegoat. The perfect target is obviously financial markets, and not just the credit rating agencies. It is the markets that are holding the governments to account for their inability to live within their means, pushing bond yields up. The news over the weekend that various London-based hedge funds have done well out of the euro crisis will only fuel the desire to blame financial services – and indeed London. The UK went through the same when we fell out of the ERM, and responded at first by demonising George Soros for breaking the Bank of England - when in fact it was the flawed policy that was to blame. I make a confident prediction: the EU will react to the euro sovereign debt crisis with a renewed wave of legislation aimed at “taming” financial services.