London Mayor Boris JohnsonANDREW WINNING/Reuters
The European Parliament in Brussels is usually more of a talking-shop than an initiator. At the instigation of Philippe Lamberts, a Belgian Green member, however, it has unwisely amended a new set of European Union banking regulations, in a way that threatens to hobble the operations of London's financial district, known as the City. The change would restrict banks' ability to pay bonuses to their employees – no other financial centre in Europe is large enough to be seriously affected. Until now, the EU has never passed financial regulations to which Britain objected.
The amendment, not yet definitively enacted, would forbid banks to pay bonuses more than equal to an employee's fixed salary, with a couple of partial exceptions that would have to be ratified by cumbersome shareholder resolutions. It would almost compel banks to overcompensate many of their employees; they might well feel it necessary to approximately double salaries, reducing the variable element that gives an incentive for bringing profits that benefit the banks and their shareholders. Some firms might even try to set much higher salaries, and then turn around and penalize employees by "clawing" them back if they do not meet targets.
Boris Johnson, the Mayor of London, is right to stand up for the City, saying, "This is possibly the most deluded measure to come from Europe since [the emperor] Diocletian tried to fix the price of groceries across the Roman Empire." The emperor's price-control edict, issued in 301, was actually not confined to groceries, and was mercifully abandoned after a few ineffective years.
But this EU measure would have effects in an area much larger than the Roman Empire, because it would reach British banking operations overseas – for example, in New York, Toronto and Hong Kong. Employees there might well start looking for jobs in non-British-owned banks.
Mr. Lamberts' amendment was needlessly tacked on to the EU law implementing the international Basel III standard on bank regulatory capital. A Green in Brussels, he is also a member of a Belgian party called the the Écologistes Confédérés pour l'Organisation de Luttes Originales (Confederated Ecologists for the Organization of Original Struggles), a name that does not promise much economic expertise.
With all its economic woes, the last thing the EU should be undertaking is sabotage against its greatest financial centre, London.