EU Parliament Goes Too Far With Banker-Bonus Cap

It was plausible until recently to think that the European Parliament, the directly elected arm of the European Union’s system of government, was created mainly for comic effect. Not any longer.

The Parliament’s assertion of power over the regulation of bankers’ pay has shown that Europe’s legislature now matters, as it should.

Complaints about Europe’s so-called democratic deficit have rung true for years. Policies affecting every aspect of life in the EU’s member nations emanated from the European Commission (the EU’s unelected bureaucracy) and the European Council (which collects the representatives of national governments). At the EU level, unlike within the member states, decision makers had no direct accountability to voters.

The European Parliament was directly elected, but few voters paid it much attention, and national political parties tended to send rejects and wannabes to fill it. Real power, even with respect to EU institutions, remained at home. The policy areas in which the Parliament had the right to decide -- competences in the EU’s jargon -- were few.

The Lisbon treaty, which came into force at the end of 2009, marked a decisive change. It gave the Parliament new powers, including the final say on the EU’s budget, and greatly increased the areas of competence in which the Parliament would decide EU legislation on an equal footing with the national leaders and ministers in the Council.

Flexing Muscles

The Parliament’s 754 legislators have flexed their muscles with increasing confidence ever since. Their victory over capping bankers’ bonuses -- achieved despite strong opposition from British ministers -- sets a new benchmark.

It also highlights some dangers. Let’s not dwell on the fact that this notable parliamentary success advanced a bad policy -- one that is unlikely to stop banks from taking excessive risks and that removed focus from a better policy alternative, namely increasing capital-adequacy ratios. Democratic governments don’t always get things right.

The main issue is that the policy affects one member of the EU, the U.K., far more than the others, because most bankers in Europe who earn very large bonuses are based in London. The cap is being adopted over that country’s protests. The question this raises is deep and difficult. It has been posed since the European project began and is still waiting to be answered: What is the right division of competences between national governments on one side and the EU on the other?

The answer can’t be fixed for all time and depends on how far Europe’s voters consider themselves citizens of the EU as well as of their own countries. Formally, they are already both, but when it comes to vital national interests, cultural and emotional commitments matter more than what it says on an EU passport. Europe’s economic travails have revived anti-EU sentiment across the union. The cultural conditions for closer political union aren’t in place.

The Parliament’s role in all this is delicate. No longer a sideshow, it is in a position to move integration forward through its actions and by commanding respect. Yet if it chooses to press on issues that divide rather than unite the EU, it may have the opposite effect.

That’s why the EU’s parliament should use its newly won powers judiciously. It should listen to voters -- as it rightly claims it has in the case of bankers’ pay -- but also tread carefully on questions that set one government or group of governments against the others. It should strive where possible both to reflect and to shape an EU-wide consensus. Where that can’t be done, it should back off.

Democratic Deficit

The Lisbon treaty rightly called for national parliaments to play a bigger role in holding EU institutions to account. That’s an equally valid way to fill the democratic deficit, and one better suited to the current mood. It should be pursued in addition to, not instead of, moves to strengthen the Parliament in Brussels.

The economic crisis will reshape the EU, for good or ill. Greater fiscal integration, as we have argued, is vital to make a success of the single currency. This in turn requires aspects of closer political union that the European Parliament can help to legitimize. But the case for the EU to leave decisions to the national governments wherever they can is strong.

The EU’s formal commitment is to the creation of an “ever closer union.” Aiming for a “more perfect union,” however, would be better.

To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at