April 2017 • Topic: Brexit • by Panagiotis Asimakopoulos & William Wright
Much of the debate around the impact of Brexit on the City of London and the financial services industry across Europe has been UK-centric. So we’ve read, sifted and summarised hundreds of speeches, articles and reports to identify what the rest of the EU really think about it. This report summarises the main priorities, concerns and negotiating positions of policymakers and regulators in each of the 27 member states who will be on the other side of the negotiating table from the UK over the next few years – and sums up what’s at stake.
‘The UK has been a special member of the EU for many years: it is important that it does not become a special non-member. It has to be clear that EU membership is better than any other option. The UK will notice this’. If there is a collective view in the rest of the EU of the coming Brexit negotiations, these words by German centre-right MEP Markus Ferber, are perhaps the closest thing to it.
While most of the EU27 are as keen to do a trade deal with the UK as the UK is with the EU, the UK should not expect any special favours when it comes to financial services and the City of London. Politics will trump economics, nothing will be agreed for financial services (or any other sector) until everything is agreed in all sectors, and the majority of member states are prepared to put EU unity and the integrity of the single market ahead of other considerations.
Too much of the debate in the UK about Brexit and the City has focused on what different parts of the industry want, fear and expect from Brexit; what the impact of Brexit will be on different sectors and how they will react; and what the UK government should be asking for in the negotiations ahead. And too often, the views of the rest of the EU have been caricatured as attempts to ‘punish’ the UK, steal market share from the City, and to shoot themselves in the foot. This report is an attempt to address this imbalance and to distil the main concerns, priorities and positions of policymakers and regulators in each member state on the future of financial services in the EU.
The stakes are high: the outcome of Brexit could affect a large chunk of the high levels of EU27-related capital markets activity that is currently conducted in London (which accounts for between a third and three quarters of all EU activity, depending on the sector); UK banks are more exposed in relative terms to the EU27 than the other way round; and financial services exports from the UK to the EU play a big role in keeping the UK’s trade deficit with the EU and the rest of the world at manageable levels.
This report (which you can download here) is broken down into four parts:
* A 10-point summary of the main concerns and priorities of the EU27 member states ahead of the Brexit negotiations.
* A country-by-country summary of each country’s concerns, priorities and likely negotiating positions.
* A brief summary of what’s at stake in terms of financial services trade, and access and exposure to each other’s markets.
* A more detailed analysis of the views of policymakers and regulators in each member state, and those of EU officials and institutions.
The report is not an exhaustive analysis of what different member states think about Brexit more broadly. Instead it focuses on its likely impact on financial services and the City (although many of the themes are the same and apply equally to other sectors).
Inevitably, there is a wide range in the availability and quality of commentary on Brexit and financial services across the EU27: there was far more information available in large member states such as France or Germany, or smaller member states with high levels of financial integration with the UK, such as Ireland, Luxembourg and the Netherlands. We apologise if we have misrepresented the views of any individuals, organisations or countries in this report. Please send any queries (or any additional information) to Panagiotis Asimakopoulos at email@example.com
Here is a 10-point summary of the main findings of the report:
1. Politics first - maintaining the unity of the EU and the integrity of the single market is the overwhelming priority of the majority of EU27 countries. The UK will not be allowed to pick and choose between the four freedoms (movement of people, capital, goods and services) and many countries are prepared to put politics ahead of economics. Nothing will be agreed in any sector until everything has been agreed in all sectors.
2. Tough talking - the UK will face a tough negotiation process with the three most important groups (Germany, France and EU institutions). Many of the UK closest ‘friends’ are already adopting a relatively hard stance. While there is little appetite to ‘punish’ the UK, the stance of some countries has hardened in recent months in response to ‘hard Brexit’ and the talk in the UK of ‘no deal is better than a bad deal’.
3. An imperfect alternative - there is an almost universal view in the EU27 that a deal based on equivalence (allowing firms based in the UK to continue to access EU markets based on broadly equivalent regulation) would not be appropriate, and very few policymakers in the EU have expressed public support for the sort of ‘enhanced equivalence’ regime that the UK has floated. Most (but not all) countries accept the need for a transitional deal, but only for a short period and on the condition that the UK falls under EU jurisdiction during that period.
4. A focus on financial stability - the main concern of most supervisors and regulators in the EU27 is financial stability and close cooperation with the UK authorities post-Brexit, given the high level of financial integration between the UK and EU27. Many supervisors are insisting on firms having a substantial local presence as part of any relocation, and any deal on financial services should include shared oversight of euro-denominated trading and clearing (and some countries are pushing for enforced relocation of these activities).
5. The future of the City - most countries accept that London will continue as the dominant financial centre in Europe post-Brexit, but that a range of financial centres in the rest of the EU will benefit from the relocation of some UK-based business. The UK will lose influence in financial policymakingin Europe: there is growing support in the rest of the EU to accelerate the integration of supervision, regulation and market infrastructure across the EU27.
6. Competing for business - the UK faces a wide range of competition for business in different sectors post-Brexit. Some countries (such as France, Ireland, Italy Luxembourg and Poland) are actively pitching for firms to relocate, offering tax breaks and other incentives. Others (such as Germany, the Netherlands and Sweden) are taking a more passive approach to competition. Everyone agrees that some relocation of UK-based activity will be required if UK-based firms want to retain access to EU markets.
7. An expensive rebalancing act - Brexit will lead to a potentially healthy rebalancing of financial markets activity across the EU as no single financial centre will be able to attract or accommodate all of the business that moves from the UK. This will be accompanied by an increase in the cost and complexity of financial activity due to duplication and relocation – but that is seen as an unfortunate but necessary political trade-off.
8. A weaker hand - the importance of the City to the EU economy is not as a strong a card as many in the UK might have hoped. EU27 member states recognise the asymmetric trade-off between the importance to the UK of financial services exports to the EU and the import of goods from the EU. An agreement on financial services will be the hardest part of trade talks, and getting a deal for the City is more important to the UK than to the rest of the EU. The EU27 knows that the UK needs a deal on financial services, and really wants one on trade in goods.
9. A tortuous process - negotiations will be more complex and more political than the UK media suggests, and will require a lot of give and take. While the EU27 is keen to arrange a trade deal, an agreement on services will be tougher because the jobs, control and value remain with the country that hosts the service providers. The formal negotiations period under Article 50 will be less than two years once you take the approval of EU institutions and members states into account, but few people in the EU27 expect a deal to be agreed in less than two years.
10. A race to the bottom? - any suggestion that the UK would aim to attract business post-Brexit through deregulation or a more aggressive tax policy would be seen as a direct threat to the EU27 and trigger a tough response. The UK cannot set lower taxes to attract business because it needs tax revenues for its budget deficit and will have to adhere to global norms such as OECD guidelines.