Brexit will devastate the City and harm European finance – or will it? Wolf-Georg Ringe thinks not. He points out that the EU has shown remarkable flexibility in the past as it tried to fend off financial meltdown. It has ignored state aid rules in order to bail out banks, for example. The deal eventually reached between the UK and the EU27 is likely to either keep the UK in the single market or give its financial services passporting rights.
Among participants in the global financial market, Brexit is commonly painted as an almost Apocalypse-like scenario. The threat of a British exit from the European Union, they say, involves a significant disruption to financial integration in Europe, will threaten the pre-eminence of London as a global financial centre, and will impose significant costs on all market participants.
In a recent paper, I take a different position on the significance of Brexit for the European financial market. I argue that, in reality, the impact of Brexit for financial services will be minuscule, if not irrelevant. My optimism is grounded first in the economic stakes for both sides, the UK and the EU27 in retaining the benefits of the European Single Market for financial services. Given the joint economic interests of both sides, a likely outcome of the Brexit negotiations will be a solution that formally satisfies the 2016 referendum result, but in substance keeps Britain closely involved in the EU financial market.
In its main part, the paper borrows from past examples in EU financial market integration that saw ingenious creativity at work in facilitating a desired outcome within the existing convoluted legal framework. This became particularly apparent during the 2008/09 global financial crisis and the ensuing 2010-12 sovereign debt crisis. One of the central tenets of policy-makers, regulators and supervisors has always been to put economic necessities over formal legal problems. As The Economist put it, ‘Given a choice between financial stability and the rule book, ditch the rule book.’
The genesis of the EU financial market framework is full of such examples, particularly during the 2007-09 global financial crisis. Among the many examples is the famous conflict between EU state aid rules and bank bailouts. The massive scale of taxpayer-financed rescue operations for domestic banks carried out by many EU Member States ran directly against the prohibition to support local firms because of market distortion risks. However, faced with an unprecedented risk of a global meltdown, the EU institutions had no other choice than to rubber-stamp all those bailouts, arguably bending state aid rules to almost beyond recognition.
Another example is the controversial line of activities pursued by the European Central Bank, spanning Long-Term Refinancing Operations for banks (LTRO) since 2008, the controversial ‘Outright Monetary Transactions’ (OMT) in 2012, and today’s quantitative easing.
The broader point is thus that legal principles are easily set aside when economic exigencies so require. This experience leads us to predict a similar approach being used for accommodating Brexit. My paper therefore predicts that a specific, tailor-made agreement will be concluded between the UK and the EU 27. Formally, this will satisfy the requirement of leaving the EU. In substance, however, the outcome may either embrace full single market membership or focus on equivalence of the UK regulatory regime, securing a third-country passport for UK financial services providers. A transition regime is considered paramount in facilitating a smooth change.
This post represents the views of the author and not those of the Brexit blog, nor the LSE. It first appeared at the Oxford Business Law blog.
Wolf-Georg Ringe is Professor and Director of the Institute of Law & Economics at the University of Hamburg. He is also a Visiting Professor at the University of Oxford, Faculty of Law.