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.
While I can follow the economic rationale, I think this assessment is off for three major reasons: 1. The flexibility of the EU in the past was based on the need to preserve the unity of the Eurozone and the EU itself. Here we are talking about future concessions to a country outside of the union. Very limited political incentive there to do so. 2. The sentiment massively neglects the political side of this debate. A seperate deal on financial services will only be possible on the basis of a functioning Brexit deal which currently does not look good because the debate currently is emotional rather than pragmatic. 3. It underestimates the keen competition within the EU that sees a chance to siphon off some finserv business from London towards the EU. So as much as I like the intellectual exercise undertaken here – I dare to predict the result will differ quite a lot. All the while I hope I will be wrong
the EU will do anything to ensure its own wellbeing and survival, unfortunately it never shows the same sort of flexibility when its not being threatened and that is why it is heading down the pan.
You explain that the EU can bend the rules if it wishes to.
You have not explained what the evidence is that the EU wishes to.
It seems to me the EU would have a strong incentive to make a special finserv deal with Britain because London is the dominant location of euro clearing. It’s difficult to see how they could stop London performing such a function, but should it escape EU jurisdiction then the precedent is the creation in London of the Eurodollar market of US dollars held beyond American jurisdiction.
Because they were beyond the Fed’s control, Eurodollars were deemed riskier and therefore attracted higher returns. Meanwhile since they were not subject to US regulations that were considered unduly restrictive they were particularly attractive to investors.
The results included that the Eurodollars market became one of the most popular sources of investment money, US control over its currency was weakened, and the Eurodollar could be used to attack the conventional dollar.
Should precedent be followed with respect to the euro then that would be one more existential threat for the rickety currency. I think the EU need a deal.
Possibly that would be on the lines of the UK granting the ECB oversight of euro clearing and the ability to intervene in the event of a crash in the euro clearing market, in return for extensive passporting rights.
Grant the ECB oversight of Euro clearing?is that you Mr. Verhofstad?
The big advantage for Britain of allowing ECB access and control regarding this minor part of the British economy is that if there is a crash — as may be quite likely should countries exit the eurozone — then it would be for the EU to come up with the funds to bail out the market if required, not the British taxpayer. At least, that’s how I imagine such a deal working.
Why would the British taxpayer bail out the market?If the ECB wants to support the Euro in any which way, that is up to the EU members to decide, or not decide, in which case the ECB can do as it pleases.The EU may need a deal, the City, in that regard, certainly in general, would like to work under EU oversight, but the English and Welsh people have indicated they want out.A special deal for the City to allow it finserv privileges in the EU remainder will not go down well with the rest of England.What the Welsh were to think of it, I don’t know, but logic dictates they would rather see British taxpayers subsidise Wales than underwrite the losses due to hugely profitable casino operations in the City.Maybe the City shoud set aside a certain amount of its profits every year to cover the bail-outs.
From a post-Brexit UK perspective, imagining that the ECB will not support the Market unless it has oversight in London or imagining that it will when it has oversight is a waste of time.The EU is proving to be a pain in the neck and it must be to make an example of the UK so as to discourage the others who might think of getting out.The EU is a house of cards run by a clique of card-sharps.The City will dabble in the Euro at its peril if it does not know what it is doing, and, indeed, if the City is overwhelmingly in favour of staying in the EU under EU Commission tutelage, one has to wonder whether the City is not totally in cahoots with the EU federalisers and willing to bet the finance houses in the City against the electorates in all EU member states.
Exactly, the British taxpayer wouldn’t bail out that market, and that for the ECB is the problem. If the ECB has no ability to bail out that market and they decide they need to then relations between U.K. and EU could get extremely strained, and moreover the eurozone might go into a crisis, which would not be in Britain’s interests either. As I understand it, if the euro clearing market is outside ECB jurisdiction then they would not have the ability to inject money in the event of a crisis. I could well be wrong on that point, however…
Anyway, I was just making a suggestion of how things might end up.
Yes, nothing wrong with suggestions.As it stands, relations between the EU other members/EU remainder and the UK are likely to get strained from time to time, as they have been in the past.The Euro has been in crisis since, well, 2008,The ECB has been pump priming at a rate of knots, supposedly to engineer inflation above the low rates achieved sofar, if achieved is the right word-Inflation in the Euro zone appears not amenable to manipulation.Sooner or later the Euro crisis will come to a head.That means the UK will have some leverage over the EU remainder, which will always come handy.It is not as though the EU has been civil and accommodating towards the UK recently.
And QE in the Euro zone has been about ten percent of GDP in recent years.Whoever controls the EU Commission, they are worried about deflation and not only are they not worried about inflation, they positively want more of it.Since this policy is followed along with austerity measures for the mass of people and the highest socio-economic quintile is getting higher returns one way or another, when another bail-out is needed, the banks, high finance and the multinational corporations should look after themselves or each other.But, of course, that is a political question, not an economic one.Looking at the rest of the world, people in Europe can be squeezed a lot more.It is simply a matter of knowing when to ease up and for how long.We’ll see.