Few would claim that lawmaking is a simple business. And it certainly does not get any easier when a piece of legislation will cover the actions and intentions of some 500m people and myriad companies and institutions in 27 countries.

A particular threat caused by the European Union’s unique set-up is that its laws have unintended consequences. An attempt to tackle market barriers in some member states may end up causing new restrictions somewhere else. What works well in one country can lead to mayhem in another.

This dilemma was once again in evidence earleir this week, when the European Parliament gave its final approval to an important change to the EU’s banking laws.

The problem that the amendment was trying to tackle was first thrown up in the dramatic and highly entertaining battle between the European Commission and the former governor of the Italian central bank, Antonio Fazio.

Mr Fazio had tried in 2005 to block takeover bids by Spanish and Dutch banks for two Italian lenders. He could do so thanks to an EU law that gives central banks the right to scrutinise cross-border banking deals to ensure that the tie-up does not cause financial instability. Brussels believed that Mr Fazio - who was later revealed to be embarrassingly close to senior Italian bankers - was acting for protectionist reasons.

A similar case occurred in Poland a few months later, though here it was actually the country’s central bank that clashed with the government’s hostility towards foreign intervention.

The Commission, in any case, jumped into action. It proposed an amendment that would have drastically curbed the powers of central banks to scrutinise such deals. They would have had less time, only 30 days, to conduct their probe, and they would only have been able to oppose a deal on very narrow, tightly defined grounds.

Brussels’ intentions - to increase competition, open up markets and facilitate cross-border consolidation - are correct and laudable. But there is still something vaguely unsatisfactory about a law that was triggered by nothing more than one - maybe two - instances of abuse. Indeed, some diplomats warned during the negotiations that the tough regime proposed by the Commission would help tackle the (extremely rare) cases where central banks overstep the mark - but come at the price of complicating the far more numerous cases of uncontroversial banking mergers and takeovers.

It seems that a broadly sensible compromise has been found, which saw the Commission’s original proposal watered down in several key areas. Hopefully, the changes will help to keep future Fazios at bay while allowing central banks their rightful role in ensuring the stability of their national banking system.

But that outcome is far from assured. It could well turn out that EU legislation is simply too blunt an instrument to solve the problems thrown up by the Fazio case. And some bankers and supervisors must fear that the desire to prevent a repeat of that battle will create new skirmishes elsewhere.

March 14th, 2007 in Brussels | Permalink