David Frum

02.28.13

Vengeance is Rarely Good Policy

SHAUN CURRY/AFP/Getty Images ()

Under a new deal put forth by European Union officials, bonuses will be capped at each employee's current salary. Anything higher would have to be approved by shareholders.

Not surprisingly, the UK (the largest financial services center in the EU) is up in arms over this new policy and hopes to implement their own banking reform, The Vickers Plan, which will not have bonus caps.

The Vickers plan, based on the Independent Commission on Banking report led by Sir John Vickers, is designed to keep saver and business deposits from being compromised by the more speculative activities typically undertaken by investment banking operations.

London argues the EU's bonus rules would drive away talent and restrict growth in the financial sector.

In order to stay competitive as an international banking institution, a bank must offer competitive salary packages in order to attract the very best. This system may be completely flawed, but until all or most international banks agree to also cap bonuses, they are unfortunately is here to stay.

These new EU financial regulations will likely find a majority of support, especially from those nations with double-digit unemployment, but it will fail to help because it is a policy of revenge, rather than pragmatic action that will help prevent another financial crisis.

The EU needs the United Kingdom to remain within the Union in order for it to maintain its legitimacy. In the UK, though, there has already been a recent upswing in Euroskepticism. This will only force David Cameron to take a harder line against the EU, which is also an awful idea.