The European Union’s execut ive announced plans Feb. 2 to tackle speculation in commodities with new controls on trading to stop runaway prices for grain and energy.
Spiralling food prices, which helped spark deadly riots that brought down the ruling regime in Tunisia, have prompted Middle Eastern neighbours to stockpile grain.
Rising commodity prices have also been blamed for fuelling a spike in British inflation that could complicate the country’s bid to rejuvenate slow growth by keeping interest rates low as prices rise.
The European Commission, which writes laws to be signed off by the region’s 27 countries, published an outline of plans Feb. 2 to tame the speculators some believe are driving food prices higher.
“Between 2002 and 2008, the number of financial contracts for derivatives in commodities has tripled,” said Michel Barnier, the commissioner in charge of EU financial reform.
“We are no longer talking about foodstuffs. Agricultural products are turning into financial assets.”
Barnier wants to beef up the powers of regulators to intervene when speculative positions in derivatives – whose value is tied to a commodity – send grain or energy prices spiralling.
He plans to push traders to disclose their positions and is considering imposing so-called position limits to stop mega-trades that could upset markets.
“We need to know who is doing what,” said Barnier. “We need to set out rules … This will include the possibility of including position limits.”
Were it to tighten rules, the EU would be catching up with the United States, which has already agreed on trading caps.
“Like the U.S., the EU needs to have a special regime for commodity derivatives,” said Sony Kapoor, head of London think-tank Re-Define.
“Buy and hold investor involvement is bad for producers and consumers but good for investment banks and fund managers.”
Derivate traders, however, reject the idea of such controls.
“I do not think that position limits is the way to go,” said Anthony Belchambers, head of the Futures and Options Association in London, representing traders in Europe’s biggest derivative market. “It comes down to a back door form of price control”
The clampdown by the European Union, one of the world’s biggest food exporters, is being driven by France, with the backing of German Chancellor Angela Merkel.
French President Nicolas Sarkozy, who chairs the G20 until November, has promised to push this to the top of the agenda for the group of the world’s most important economies.
As in the past, however, Berlin and Paris are likely to face opposition to any new regulations from London, Europe’s hub for commodity trading, presenting an obstacle that could force them to water down their proposals.
France and Germany may also struggle to persuade global partners to back their position, as happened with a failed bid for a tax on financial transactions including share trades.
Much of the success of any drive to control commodity trading in Europe will depend on a new EU watchdog set up to monitor markets but many are skeptical that the small 30-man agency will have the clout to intervene.
Politicians have repeatedly blamed financial speculators for causing the crisis, but officials in Brussels are grappling to understand whether they really played a role.