The bitter split over the war on Iraq between Britain, Germany and France has highlighted the w...
The bitter split over the war on Iraq between Britain, Germany and France has highlighted the widespread fragmentation that is threatening the European Union (EU) both politically and economically. It seems that EU member governments find it remarkably easy to forget the unifying spirit of the union as soon as political bickering starts.
Trade barriers continue to prevent the effective cross-selling of many financial products in Europe and even within the eurozone. These barriers are made from a combination of incompatible tax regimes, inertia on the part of regulators and the lack of a single capital market.
The political will to finish the implementation of a truly open market may not really be there, but much of this is due to the reluctance of the large financial institutions who, with some notable exceptions, have not been encouraging the spotlight of competition to focus on them. One suspects this is because they are not sure what blemishes the glare would expose. And to continue the analogy, the reason for this doubt is that they have not looked in the mirror for a long time.
This attitude is driven by fear of increasing competition, lower margins and the pressure to become lean, aggressive, acquisitive companies. And yet, according to the European Financial Services Foundation (EFR), a trade body comprising banks and insurance companies, this lack of openness is beginning to hurt all the players in the industry ' not just the newcomers. EFR estimates a Eurozone GDP growth of 0.5% could increasing by a third on the breaking down of these barriers.
One of the main sources of pressure in this direction needs to come from investors and their advisers. The high costs associated with financial products (and even in the relatively open UK, costs are noticably higher than in the US) will increasingly drive money to those specialist international centres that run on low margins. The dropping of VAT in the Isle of Man, the lowering of corporation tax, and the similar (if more complex) moves being considered by Jersey and Guernsey, show that product providers can now get high-quality regimes with low costs. And in a bear market, small cost decreases make much better products.
If providers use those savings to undercut their competition, they will have chance to become sustainable players ' if they use it to boost their profits, they will probably just damage their longevity.
There is another area that looks to provide many opportunities to both intermediaries and product providers ' pension provision.
EU governments are going to have to realise that the softly-softly approach to persuading citizens to invest more for their retirement is not going to work. Strong publicity and generous tax breaks will have to be used to get anywhere near solving the pensions crisis. But the high cost solutions offered by many product providers will, over the whole of the EU, severely hamper attempts at rectifying the savings ratio.
The creation of a significant, truly cross-border private pension market will probably be a vital ingredient in this crisis. Intermediaries should keep their ears close to the ground because, despite the political punch-ups, when it comes to the happiness and wealth of the voting retired population, politicians can become remarkably good at making rapid agreements and becoming best friends once more.
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