EU-wide 'super regulator' poses threat to City of London By Ambrose Evans-Pritchard Last Updated: 12:32am BST 22/05/2008 Have your say Read comments A top cast of European statesmen has issued a blistering denunciation of financial markets and called for a creation of a pan-EU body to protect the citizens against the "social risk" posed by modern capitalism. Nicolas Sarkozy and Angela Merkel Nicolas Sarkozy and Angela Merkel have called for measures to clamp down on 'speculation' "The financial world has accumulated a massive amount of fictitious capital, with very little improvement for humanity," said the group in an open letter to the European Commission and the EU presidency. "The current financial crisis is no accident. It was not, as some top people in finance and politics now claim, impossible to predict. For lucid individuals the bell rang years ago. This crisis is a failure of poorly or unregulated markets, and shows us, once more, that the financial market is not capable of self-regulation," it said, calling for the a new "European Crisis Committee" to take the matter in hand. "Free markets cannot ignore social morals. Decent capitalism needs effective public policy. But when everything is for sale, social cohesion melts and the system breaks down," it said. The letter is signed by former premiers and finance ministers from Europe's socialist bloc, including ex-German Chancellor Helmut Schmidt, France's Lionel Jospin and Michel Rocard, and former Commission chief Jacques Delors. While the initiative comes from the Left, it is in tune with the views of French president Nicolas Sarkozy and German Chancellor Angela Merkel. Both have called for measures to clamp down on "speculation". advertisement The fulminating text is the clearest evidence yet of the mounting drive for an EU-wide "super regulator", which would reduce Britain's Financial Services Authority to a regional branch - and pose a grave threat to the City of London. "Financial markets have become increasingly opaque. The size of the lightly or not-at-all regulated "shadow banking sector" has constantly increased in the last twenty years. Inadequate incentive schemes, short-termism and blatant conflicts of interest have enhanced speculative trading. One investment bank earned billions by speculating downwards on sub-prime securities while selling them to its clients, epitomising the loss of business ethics!" the letter said. European critics of Anglo-Saxon "casino" capitalism have seized on the credit debacle as a chance to clip the wings of the City and to extend EU jurisdiction deeper into financial affairs - a jealously-guarded domain of EU member states. They know that Britain is unusually vulnerable to pressure after the Northern Rock affair, which exposed grievous shortcomings in the UK regulatory structure. # Letter to President European Commission JosÃ© Manuel Barroso Brussels has so far played down suggestions for an EU "super regulator". Commission president Jose Manuel Barroso is an Iberian free-marketeer, but his term is coming to end. Charlie McCreevy, the "Thatcherite" single market commissioner, is almost certain to be replaced by somebody less sympathetic to London next year. # Read more by Ambrose Evans Pritchard Britain may not have veto power to block unwelcome moves. Proposals under some single market clauses in EU treaty law can be pushed through by a majority vote. Britain can no longer count on Poland as a free market ally, tipping the balance. The letter leaves no doubt that hedge funds and private equity are on borrowed time in the new political landscape left by the credit crunch. "Rising income inequality has gone in tandem with an ever growing financial sector. This financial crisis has thrown some light on the alarming income differentials which have increased in recent decades. Ironically, many CEOs' salaries and bonuses reached incredibly high levels while the performances of their companies stagnated, or even went down. There is a huge ethical issue here," it said.