Coronavirus, the Euro, the EU and Brexit: all are becoming inextricably intertwined.
This can be seen with contagion of a separate sort threatening the EU’s – and thus the world’s – financial order, as the economic impact of Covid-19 bites harder and harder. For the EU and the Euro area, existential questions now arise, as the countries of southern Europe in particular face an unprecedented need for vast sums of money to get through the crisis.
Naturally, the political classes in the EU are less focused now on trade negotiation with the UK. The arguments in recent weeks have been all about whether Germany can afford, and will decide to accept, ’mutualisation’ of new sovereign debt across the EU; or whether, instead, the Germans will continue with their insistence that each EU state must retain sole responsibility for the obligations of their own country’s debt.
Germany’s longstanding refusal to mutualise sovereign EU debt had already meant that many EU states, even before the pandemic, were struggling to fund their deficits; if they are now forced to self-fund their lockdown strategies, it could drive several countries, not least Italy, over the brink.
Until now, with the City of London operating within the EU’s regulatory framework, the impact on Eurozone banks and on the ability of EU corporations and citizens to access global markets efficiently and cheaply, was lower. But now EU banks must take on the new burden of supporting further EU fund-raising, whether as country bonds or EU- wide ‘Coronabonds’, plus the cost of financing a swathe of nigh-on bankrupt SMEs in each country. The fact that the City is now no longer part of the EU or its regulatory framework means that Eurozone banks in particular will come under much greater scrutiny than before.
The EU has made noises about handicapping the City of London by blocking access to EU markets unless the UK aligns itself closely with the EU’s regulatory approach. But the current situation makes it increasingly clearer that the boot is in fact on the other foot: the assistance of the City of London will be important in supporting eventual economic recovery within the Eurozone. This in turns requires the EU to be cooperative if it is to get that support.
In this negotiating environment, it is key for the UK to understand its own strengths and take proper advantage of three key considerations that EU negotiators will –publicly or privately– be taking into account when it comes to financial services.
The EU’s first consideration will be the list of potential economic and practical problems that would be created for the EU’s banks by a world of multiple subsidiarisation of banks, that could be imposed by the UK on the EU, should the UK decide to go that way.
The second consideration is the unlikelihood of bluff and bluster working in this new environment.
The EU’s third consideration will be of the political pressure that could (indeed should) be brought to bear by the UK.
Let’s look at each of these, in turn.