An EU directive proposal regulating hedge funds and private equity could set the EU up for a real fall. As of yet, the proposal does not generate a whole lot of chatter outside of London but it should: in the rest of Europe too hedge funds and private equity are, as a reader put it in an email, not exactly non-existent.

Europeans should be aware of what Brussels tries to do and how it will impact all of us – because it will.

The Economist correctly opines that the proposal is a typical product of the EU – not need to stamp “made in Brussels” on it. The bill’s quality makes it perfectly clear where it comes from. It’s “a ragbag of measures requiring more disclosure, greater controls over leverage and tighter restrictions on non-EU funds. Some of these ideas make sense: more disclosure will help regulators to monitor the systemic risks that may be building outside the banks. But the poorly drafted proposal lumps different types of manager together. Controls on liquidity make much more sense for hedge funds than they do for private equity, for instance; the reverse could be argued for leverage limits.”

Can you imagine how outraged you would be if your doctor would give you medicines against the flu while the problem is that you are suffering from a broken leg? Well, that is exactly what the EU is doing.

Additionally, the authoritative magazine wonders, “why on earth is the EU concentrating its fire on hedge funds and private-equity firms anyway? Some behaved irresponsibly during the boom times, to be sure, and many have been caught up in the bust. But they were not the cause of the crisis.”

Although this bill will have a major impact on every single member state, Great Britain is the only one lobbying against it as of yet because it realizes that the bill will put London at “a disadvantage compared with cities such as New York, Geneva and Hong Kong.”

Other European states are wise to follow in Britain’s footsteps, however, because the entire EU’s economy does in no small part depend on the strength of the British economy which is heavily focused on financial services including private equity and hedge funds.

As Business Week notes, “going after the Masters of the Universe may help EU politicians win votes, but overzealous reform could put Europe at a global disadvantage if money moves instead to more hospitable locales. Says the AIMA’s Baker: ‘Brussels shouldn’t muck around with international capital flows. There’s too much at stake.’”

The Globe and Mail’s Eric Reguly adds that “the funds, which are a huge business in London, won’t jump on the Eurostar and re-emerge in Paris. They will leave the EU entirely for Switzerland (not an EU member; some funds have already moved there) or any of the financially ambitious Middle East and Asian cities – Abu Dhabi, Singapore, Shanghai – which are dangling gold and pearls before the big-name fund managers.”

Although Brussels would never admit it, the sad reality of the situation is that it has no idea what it is doing. It prescribes the wrong medicines to deal with this disease – the economic crisis – and seems to prefer politics over substance. Reforms may be necessary, but we can most definitely do without bad reforms.