User:AnaUCL/Revolving door (politics)

Previous work on revolving doors
The revolving door phenomenon has become a public interest in the 2010's, with the writings of Andrew Baker, Simon Johnson and James Kwak. In the literature, it has been described as a means to influence the financial industry. This theory gained a new level of importance in the United States, following the 2008 crisis, when prominent government figures insinuated that previous and future hirings in the financial sphere manipulates the decision-making of eminent government members when it comes to financial matters.

''Governments hire ..... they represent.''

Consequences of the revolving door movement
Scientific papers have demonstrated the consequences of the revolving doors practice and the side effects of those movements are numerous. These can be beneficial either for the companies or for the regulatory bodies.

Authors, such as David Miller and William Dinan, have claimed that there are risks when going in and out of revolving doors. The consequences of this movement can be conflict of interest or the loss of confidence in the regulating institutions. Another possible side effect of the revolving door practice is that regulators could give away confidential information held by the financial institutions. which would give companies the possibility to get access to information and people involved in the decision making process of regulating authorities. Revolving doors can also lead to unfair competition advantage as well as an unfair distribution of influencing power. Economic distortion can be explained through the fact that so-called too-big-to-fail firms generate their power in the market through the mechanism of the revolving door and not through salient choices. This is due to the fact that big companies have more money than smaller ones and can thus allow themselves to hire more revolvers.

Another aspect of the revolving door practice is that regulators might be incentive to push for softer regulation in order to gain access later on in the private sector. Vice-versa, regulators can also be influenced to demand for stronger stances in policy fields that will benefit the regulator if he aims at a future career in the private sector.

Furthermore, revolving doors make it easier for regulatory agencies to find adequate and qualified workers.

In practice, banks can gain unlawful advantages by legally and illegally manipulating the different stages of policy-making. They can have an impact on the formulation, adoption and implementation of laws, public policies or regulations in different ways:


 * Firstly, if (former) Members of Parliament have links to private companies, they can have an influence on the adoption of laws and regulations in their favour. Moreover, they may be reluctant to vote on proposals that would harm corporate interests.
 * Secondly, if companies have connections to (former) ministers and their advisors, they may affect the formulation and implementation of policies and regulations in advance or take advantage of non-public information about the regulated industry. This means that the companies can get in advance notice of incoming regulations and that they can be warned of further consequences, negative as well as positive . In most European countries, but also in the US, the use of insider information is punishable by law. In practice, insider trading is most often observed on the stock exchange and also plays a role in revolving doors.

The European Union
There are different rules applied regarding the institution/agency/body involved.

Applying rules
The general principle is the following: the Staff Regulation and Article 339 of the Treaty on the Functioning of the European Union apply to all EU officials. However, each institution/body/agency has to adopt its own internal rules and to annually report on this implementation of art. 16 Staff Regulation addressing the revolving doors problem.

This Staff Regulation addresses the rights and obligations of officials such as their duty of impartiality and loyalty (art. 11). Therefore, the Appointing authority shall examine if there is no conflict of interest undermining the EU official’s independence either when recruiting them or when they come back after a break. Moreover, EU officials must not have any direct or indirect involvement in matters that may impair their independence (art. 11 a). Also, if they are engaging in an outside activity (paid or unpaid) or any assignment during their mandate, EU officials must seek the authorization of the Appointing authority. It shall be refused if it impairs with the EU officials’ duties or the institutions’ interests (art. 12b). Finally, EU official’s duties to integrity and discretion continue to stand even after leaving service (art. 16). There is a cooling-off period of two years within which they must notify their intention to engage in a new activity to their institution, aiming at constraining the revolving door problem. Finally, EU officials shall refrain from any unauthorized disclosure of information received in the line of their duty (art. 17). Article 339 TFEU highlights the obligation of professional secrecy, during and after EU officials’ services.

European Commission
The commissioners are chosen according to their general competence, European commitment and independence “beyond doubts”. They are also subject to different duties such as independance, integrity and discretion regarding the acceptance of certain benefits and or appointments during and after their mandate (art. 17 §3 TEU + 245 TFEU). If those duties of integrity and discretion are breached, they may be subject to judicial proceedings leading to the suspension of their pension and/or other rights or to be compulsory retired (art. 245 + 247 TFEU).

The Commission has established its own Code of conduct in 1999. It was revised already in 2011 and then “reformed” after the Barroso Case in 2017 (cfr infra). This last version has been applied since the 1st February 2018. The key features concern the declaration of interest, transparency, the cooling off period and the “new” Independent Ethical Committee.


 * First, each commissioner, before being appointed, has to fulfill a declaration of interests which is revised each year and made public. It aims at highlighting financial interests that may give rise to conflicts of interests, any function occupied during the past 10 years, and pointing to affiliation to organisms susceptible to influence the exercise of their public mandate. It may concern spouses and minor children, if needed (art. 3). Those are the main areas of inquiry during the European Parliament’s hearings prior to the effective nomination of a commissioner. If such a conflict of interest emerges, there is a procedure that may end by a recusation (art. 4).


 * Second, commissioners can only meet with people registered in the Transparency Register, when those meetings fall within the scope provided by the 2014 Interinstitutional Agreement between the European Parliament and the European Commission (art. 7): “activities concerning the provision of legal and other professional advice are not covered” (point 10). This register is not comprehensive since its material scope does not cover all activities influencing the decions-makingp process, the formulation and implementation of EU law. Therefore, the European Parliament, the Commission and the Council of the EU (for the first time) reached a compromise agreement on a mandatory Transparency Register since 15/12/2020 but still has to be formally adopted.


 * Thirdly, there is a cooling off period of 2 years during which a two months’ notice is required before taking any job/benefits or appointments (art. 11, §2). If the activity is related to the commissioner’s previous portfolio or seems to be contrary to art. 245 TFEU, the Independent Ethical Committee must be consulted. However, there is no authorization needed in some cases explicitly addressed in an exhaustive list (art. 11, §3). Moreover, ex-commissioners are barred from performing direct lobbying but only for 2 years (art. 11, §4). If the person concerned was the former President, the cooling-off period has been extended to 3 years (art. 11, §5). Still, there is no cooling period if it concerns public service meaning that the ex-commissioner can take a public service job without any cooling off period (art. 11, §6).


 * Finally, the previous “Ad Hoc Ethical Committee” has been renamed “Independent Ethical Committee”. Its members are appointed by the Commission on the proposition of the President and their deliberations are confidential while their opinions/final decisions are made public (art. 12). If the commissioners or the President breached their duties and cooling-off  period but the material scope does not enter in the application of art. 245 or 247 TFEU, then, the concerned person may be reprimanded, even publicly, by the Commission. In accordance with art. 16 of the Staff Regulation, an annual report has to be published, including the work of the Committee (art. 13). Also, the President may ask the commissioner to resign (art. 17, §6 TUE).

European Parliament
In its 2005 Statute for the Members of the European Parliament (MEPs ), general principles and duties are laid down. Indeed, MEPs should remain free and independent (art. 2), they must not be pressured or exert any binding mandate (art. 3) and “safeguard their independence” (art. 9).

The European Parliament has also established its own Code of conduct which has applied since 1/1/2012. Here, the code provides an explicit definition of “ conflict of interest “ (art. 3). MEPs must also establish a declaration of financial interests (art. 4). Former MEPs’ activities may involve lobbying but must be notified to the European Parliament. Consequently, those MEPs involved in lobbying must not benefit from the facilities granted to others former MEPs (art. 6) such as entering the Parliament’s building, using Parliament’s restaurants and cafeteria, libraries, documentation centers or car parks. In the same vein of the Commission, there is also an Advisory Committee that must, in accordance with article 16 of the Staff Regulation, publish an annual report (art. 7). If there is an alleged breach, the President of the European Parliament refers to the Advisory Committee, which may conduct an audition and then refer back to the President on what can be done. The Member under investigation may give a written opinion to the President and then the President issues a reasoned decision (art. 8). There is an exhaustive list concerning the  penalties listed in art. 166§3 to §5 of the Rules of Procedures. Since April 2013, the European Parliament adopted implementing measures of the “Code of Conduct on Gifts received in an official capacity, Invitations to events organised by third parties and Monitoring procedure”.

Since 31/01/2019, the EP has also amended its Rules of Procedure saying that “rapporteurs, shadow rapporteurs or committee chairs shall, for each report, publish online all scheduled meetings with interest representatives falling under the scope of the Transparency Register.

If the European Parliament’s Code of Conduct seems permissive (eg. there is any cooling-off period), the Parliament is concerned by the revolving door effect and has used its power over other institutions to prevent them. In some cases, the EP must give its  approval for the appointment of the leaders/officials of other European agencies for instance the European Supervisory Authorities. In January 2020 the Parliament stopped an entering revolving door: it has declined to approve the Irish central Banker Gerry Cross from becoming executive director of the European Banking Authority (EBA) because of his lobbying past within the financial lobby group Association for Financial Markets in Europe (AFME).

Critics and developments
Former EU Commissioners passing through the revolving door attract much attention, but such situations occur in every EU institution, not only the Commission. The European Union is said to have a permissive culture. It has often waved its own rules to allow revolvers to have a job in the institutions or to be employed in the private sector after their term in office. People going through the revolving door bring industry expertise and insight that can be valuable for regulators, it can sometimes be conceptualized as an educational process by researchers working on the topic. The European Union combines very technical domains where such specific knowledge and competences could be valuable. There is a tension between the need for expertise and the resort to the revolving door to obtain this knowledge.

However, the EU has been pressured to address the issue more convincingly and to reform its rules sometimes qualified as weak. The code of Conduct of the Commission has been reformed after the Barosso Gate.This can be seen as a progress in regulating the issue but these efforts may be perceived as insufficient. Indeed, the cooling-off period after employment in the Union lasts for 18 months. In contrast, other countries have stricter rules. For instance, former Candadien officials are to wait 5 years after their term to engage in any lobbying activities. The European Parliament has also taken steps to close the entering side of the revolving door when it blocked the nomination of Gerry Cross as executive director of the European Banking Authority.

According to a report by Transparency International ....conflict of interst. Within the Union, projects have also risen against the issue and the lack of transparency it brings such as the Revolving Door Watch. This is part of a wider ALTER-EU campaign denouncing the phenomenon.

Goldman Sachs and the revolving door
Goldman Sachs the investment bank, is known to use the revolving doors in the USA as well as with former EU officials to gain expertise and/or inside information on EU regulatory matters. There are several examples of revolvers between the European Union and the bank.

Peter Sutherland was a Commissioner responsible for Competition Policy between 1985 ans 1989. He left the Commission to found the World Trade Organization and became its first president during his cool-off period from 1993 to 1995. In July 1995 he became Chairman of Goldman Sachs.

Mario Draghi is a famous Italian politician and European man. He worked in the Italian Treasury but then left to become Vice Chairman and managing director of the Goldman Sachs international division .In this branch he dealt with European corporations and governments. He also led Goldman Sachs's European strategy. Mario Draghi left the bank when he was appointed president of the European Central Bank in 2011.

Mario Monti is an Italian economist and politician. He was appointed as commissioner for the Internal Market under the Santer Commission (1995-1999) and for Competition under Romano Prodi (1999-2004). He started serving on the board of international advisers of the bank in 2002 during his term. In November 2011, Mario Monti came back in the public sphere to lead the Italian government formed by technocrats in the sovereign debt crisis.

The revolving door that received the most media coverage in Europe is the one concerning José Manuel Barroso.He was president of the European Commission for 2 consecutive terms between 2004 and 2014. He led the Commission during the 2008 subprime crisis and helped oversee the financial reforms that followed the economic collapse. In 2016, after his cool-off period former President Barroso announced his move towards the investment bank. He became the non-executive chairman. His hiring was so controversial that the Juncker Commission referred the case to the Commission's Ad Hoc Ethic Committee.

Other controversies
The European Union has seen other revolving door controversies beside those involving Goldman Sachs.

Martin Bangemann the Commissioner for Industrial Affairs was suspended from his duties in July 1999 after his decision to accept a position with Telefonica, Spain largest telephone company. While he was still Commissioner he announced that he wanted to join the Board of directors of Telefonica and that he would resign from the Commission .The Commission judged that he should have resigned before negotiating his new functions with his future employer.

Neelie Kroes has been made Commissioner for Competition in 2004, in spite of having displayed 25 corporate jobs on her resume. Later on it was found that she also served 7 years as a lobbyist for an arms manufacturer, which she had not disclosed. After her 2 terms as commissioner for Competition and later on for Digital Agenda and her cooling period she applied for a job in the industry she previously regulated.

Adam Farkas was executive director of the European Banking Authority. He left his occupation to become head of the Association for Financial Markets in Europe (AFME), a powerful financial lobby. The European Banking Authority disregarded conflict of interest and let him go without a cooling period. A complaint was lodged to the Ombudsman of the EU and it was concluded that the EBA should not have allowed that move.

A quick recap of the subprime crisis
The subprime crisis erupted in 2007 after several years of unsafe lending and speculation by US banks.

It all began when, in order to revive their economy and real estate loans, banks began to grant loans to households that did not meet credit score criteria. Subprime loans are a type of mortgage offered to individuals who do not qualify for traditional loans due to poor credit ratings and therefore pay larger interests rates in order to compensate for the extra risk taken by the lender. The crisis occurred in 2008, property prices eventually collapsed whilst the aforementioned interest rates rose. Households had reached their maximum debt capacity, thus defaulting on their loans and further increasing their debts. As a result, real estate assets were seized, which exacerbated the fall in the housing market.

This, in turn, led to a fall in investor and institutional confidence and a collapse of the stock market, ultimately developing into a global economic crisis.

The link between revolving doors and the subprime crisis
The revolving doors were so prevalent in the financial sector that they were cited by the OECD and some non-governmental organisations as one of the main causes of the 2008 ﬁnancial crisis. This crisis was preceded by the US financial sector entering more and more into cooperation with federal regulators agencies. Through the process of the revolving doors not only Wall Street veterans occupied key positions in Washington, but it also fostered the development of strong personal connections between senior bankers and high government officials, which gave the so-called “too-big-to-fail” banks, privileged access to decisions-makers and contributed to promoting the Wall Street worldview in the political world. They were finally able to persuade the policymakers that the deregulation of the financial sector was in the public interest and did not only serve their self-interest.

It is striking that a particularly large number of revolving door movements took place in 2007 and 2008. Figures show that mainly public-to-private movements, that is to say, the transition from politics to the private sector, were completed.