The E.U. Talks Tough on Bonuses, but Will It Act?

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Georges Gobet / AFP / Getty

European Commission president José Manuel Barroso, left, and Swedish Prime Minister Fredrik Reinfeldt, whose country holds the E.U.'s rotating presidency, give a press conference

Even in the current economic gloom, bankers have been loath to part with one massive perk of their jobs — the lavish bonus. Not surprisingly, this rankles everyday people greatly as they struggle to rebound from the turmoil of the past year.

Given the political climate, European Union leaders on Sept. 17 vowed to take action on what French President Nicolas Sarkozy calls "the scandal" of bank bonuses. They agreed in Brussels to seek binding rules on the allocation of bonuses, sending a strong message to U.S. President Barack Obama and the G-20 leaders who are meeting in Pittsburgh, Pa., on Sept. 24 and 25 that they are serious about cracking down on profligate spending by financial institutions.

At the summit, the leaders declared that bonuses should be tied to a bank's performance and that guaranteed annual payouts should be avoided. The group also demanded that the G-20 "commit to agreeing to binding rules for financial institutions on variable remunerations, backed up by the threat of sanctions at the national level."

The attendees themselves were even more strident. "The bonus bubble burst tonight," said Swedish Prime Minister Fredrik Reinfeldt, whose country holds the E.U. presidency. He said inaction on bonuses would be a "provocation in Europe, especially when set against a steep rise in unemployment." And British Prime Minister Gordon Brown said there would be no return to the bonus structure of the past. "I am personally appalled by some of the practices that have been going on at some institutions," he said.

The move could put Europe at loggerheads with the U.S. Last week, Obama said Wall Street could not go back to the days of "reckless behavior and unchecked excess," but he has repeatedly said he is against creating strict rules on pay. Luxembourg Prime Minister Jean-Claude Juncker said on Sept. 17 that Europe should act on bonuses "whether the Americans are with us or not."

But despite all the condemnations and harsh language, there was little actual bite behind the rhetoric at the E.U. summit. Officials failed to agree on concrete measures to limit bonuses, admitting that many of their recommendations were virtually unenforceable. Sarkozy, who has threatened to walk out of the G-20 meeting if there is no agreement on regulating bonuses, was also forced to abandon his initial call for a precise salary cap. By the end of the summit, he suggested that the best solution would be stricter rules on capital levels — a proposal that has already been made by the Financial Stability Board, a group of central bankers and regulators that has been tasked by the G-20 with formulating a plan to target bonuses.

Karel Lannoo, head of the Centre for European Policy Studies in Brussels, says it will be difficult to implement efforts to regulate bonuses in the E.U., as rules on working conditions are decided at the national level by individual governments. He adds that although bonuses are a powerful rallying point for E.U. leaders, the payouts represent just a tiny fraction of the global banking losses over the past year and are not to blame for the crisis. "Bankers are exceedingly unpopular, and leaders feel they have to act," he says. "But bonuses are a symptom of the crisis, not a cause."

Nicolas Véron, a research fellow at the Brussels-based Bruegel economic think tank, says politicians are attacking bonuses because they are easy targets. "Financial regulation is complicated to understand, and bonuses are simple. So at this point, it is 99% political signaling," he says.

Véron says dealing with issues like capital regulation is much more important if the E.U. and the rest of the world want to avoid a repeat of the economic meltdown. "But banking business models will not change one bit with these bonus rules because the ability to circumvent [this type of] regulation is unlimited," he says.

Nonetheless, the issue is popular with voters. And whether bonuses are the cause of the world's economic woes or not, the crusade against them is giving E.U. leaders a rare common cause.