European finance ministers were nearing a deal on new regulations for freewheeling hedge funds, officials said Tuesday, as the spotlight turned to the financial sector a day after ministers thrashed out stricter budget rules in the hope of avoiding another financial crisis.
There's "agreement to agree," said one EU diplomat, who asked not to be named because discussions were still under way.
For months, governments have been wrestling over a so-called "European passport," which would allow hedge funds that have been approved in one country access to all 27 EU member states.
Non-EU-based hedge funds worry that poorly designed regulation would lock them out of an important market. Countries like France, meanwhile, fear that a pan-European passport would in effect leave most decisions to the U.K. — Europe's biggest financial center and often an advocate for lighter regulation.
Hedge funds are lightly regulated investment funds that promise outsize returns to rich or institutional investors and often pursue complex trading strategies that can involve large amounts of leverage, or debt. The scrutiny of the funds is part of a range of measures under consideration in an attempt to strengthen the EU's financial system in the wake of the the global financial and economic crisis.
Paris has softened its stance on the passport, but wants the newly established European Securities and Markets Authority to be in charge of doling it out. The U.K. and Germany, among others, say that it is too early for the new regulator to have that much responsibility.
Any compromise on the passport would likely see it phased in over several years, giving governments the chance to stop it along the way.
It would still need to be approved by EU governments and the European Parliament. The parliament currently is considering much stricter rules, which would also extend to private equity firms.
Also on the table Tuesday are proposed new taxes for the financial sector. The European Commission, the EU's executive, want countries to start taxing bank profits and pay packages.
Several nations — including the U.K., Germany and France — have already introduced levies on banks, although they target banks' balance sheets rather the profits. They now hope to come up with pan-European cooperation on bank taxes.
Finance ministers will also discuss their stance on a tax on financial transactions such as purchases of shares and bonds. The commission said last week that such a financial transaction tax should be introduced on a global level — but wouldn't work if it only existed in Europe.
Negotiations took place against a backdrop of a surging euro, which has cast doubt over the continent's fragile economic recovery.
Officials have blamed the euro's jump — from $1.21 this summer to $1.39 in Tuesday morning trading — on a currency war, in which countries around the world push down the value of the currencies to make their exports more competitive.
All four issues — exchange rates, hedge funds, bank levies and financial transaction taxes — will be on the agenda when finance ministers of the Group of 20 rich and developing nations meet on Friday in Seoul, South Korea, on Friday. France, which will take over the G20 presidency next year, has been a keen supporter of a financial transaction tax.