New Year media reports suggest the UK Government thinks the EU27 is bluffing when chief negotiator Barnier states that UK-based banks will lose their “passports” to do business in the EU27. Instead, DexEU Secretary Davis has called for a “Canada plus plus plus” trade deal – implying that financial services will not find themselves at a disadvantage.
However, the Davis claim needs a very hard reality check as one of the EU’s top priorities for the first half of 2018 is the completion of a massively complex project known as “banking union” to ensure that EU taxpayers never again foot a mega-bill to bail out banks. Anyone who thinks that it will be easy for the EU to grant such a bespoke deal needs to understand what the EU27 thinks is at stake! After all, the Great Financial Crash had its European headquarters in the City of London and has resulted in a re-structuring of the EU’s economic governance rules to give a hugely enhanced role for Eurozone bodies such as the Eurogroup.
The push is on in the euro zone to complete banking union. Banking union as an aim was launched in 2012 in the heat of the euro crisis. It was seen then as a vital step to saving the single currency, which was threatened by a negative feed-back loop between sovereign debt in weaker, “peripheral” countries and their domestic banks. Now, it stands for the European project itself.
The importance of the euro zone banking system is clear: its total balance sheet is more than 250 per cent of euro zone GDP whereas public debt is now less than 90 per cent. Europe’s politicians have not forgotten that, before the financial crash, public debt used to be “undesirably high” at just 65 per cent of GDP. It hit 95 per cent as taxpayers supported “their” banks.
The most recent push toward banking union came at the European Council meeting of 14/15 December 2017. There, President Tusk said bluntly “there is no doubt that the first reality check is the completion of the banking union, which is both possible and necessary.” Without such progress on an immediate priority, the bolder visions of a European Finance Minister and associated economic governance measures are just day-dreaming. However, final decisions must be postponed to mid-2018 as Germany has yet to form a government.
However, even when Germany does have a government in place, agreement may not be easy. A meeting of European finance ministers in early December 2017 reviewed work on “risk reduction measures” originally proposed in November 2016. There were deep divisions on many key points. The Germans, in particular, are leery of a Eurozone-wide deposit insurance scheme going beyond the existing national schemes until banking risk is sufficiently reduced via a completed banking union. Can this circle be squared? Yes – but the banks themselves also need to do some work on Non-performing loans (NPLs).
What has already been achieved more widely and can the euro zone make banking union a reality? The euro zone already has a single supervisory mechanism, and a single resolution board, both unthinkable just a decade ago. Further, the euro zone is also giving more power to euro area regulators with a hugely enhanced role for bodies such as the Eurogroup of finance ministers. The talk of a euro area finance minister suggests this part of the integration process still has some way to run, but that there is determination to get there. Banking union, with a European deposit insurance fund, is probably the final prize. What would attaining the complete suite of prizes mean for London?
Reading a recent Commission summary of half a decade of legislation to integrate the EU’s financial systems (and particularly its large banks), it is easy to see the City increasingly cut off from the euro zone post-Brexit. The UK government is still determined not to be part of the European economic area, the single market, or the customs union (though the latter is not particularly relevant for the financial world). So we come back to the EU27 talk about Canada’s 'comprehensive and economic trade agreement’ (CETA) deal as the only plausible template.
What could this actually mean for financial services? The CETA document is 1598 pages long with just 230 pages of treaty language and the rest detailed schedules of tariffs and quotas. Chapter 13 is about financial services and runs to just 14 pages – with 13.16 perhaps the most difficult article for the UK as it is entitled “prudential carve-out” and provides that “a party may, for prudential reasons, prohibit a particular financial service or activity.” That short sentence opens the way for the EU27 to protect itself against another financial crisis by requiring any provider of services into the EU to comply not only with EU rules, but also the necessary enforcement process provided by the European Court of Justice.
Once the EU27 has agonisingly completed its banking union – probably including many more than 19 members, and with much carefully-structured pooling of financial sovereignty for prudential reasons – it is difficult to see an offer of re-shaping it just to meet the wishes of British exceptionalism. Moreover, about two-thirds of the members (technically, a “Qualified Majority”) would have to agree to massively complex changes to the body of just-completed law. Such UK wishful thinking about “Canada plus plus plus” may collide with firm and oft-repeated EU27 statements about “no cherry-picking”.
Graham Bishop is a member of the European Movement's Executive Committee and an experienced consultant on European Integration. You can sign up to receive his briefings and more through his 'Friends Membership' at GrahamBishop.com.