By Swedish Lex, an expert and advisor on EU regulatory and political affairs.
The City’s political clout in Brussels is waning as the UK’s financial industry model has gone from being the envy of the European peers to being a liability. Meanwhile, the EU will in the future probably be proposing new banking and financial services legislation that may be superficially marketed by decision-makers as striving to provide a clear cut with the existing Anglo-Saxon casino model. This guest post will discuss some of the fundamental choices that the City is facing, the most significant being whether or not to be advocating a UK withdrawal from the EU altogether.
The Telegraph’s prolific columnist Ambrose Evans-Pritchard is an astute observer of the financial crisis whose columns are well worth reading. In a recent comment in the Telegraph, “Does the EU club have a future?” he however falls for the temptation of regressing into state of EU-phobia that always works well with his UK home audience. His article is however not without merit as it demonstrates the deep doubt that Brits have as regards their country’s future EU membership, which is clearly illustrated by Evans-Pritchard’s closing remarks: “Since this unwelcome revolution is being forced upon us, perhaps it is time to end the long taboo and ask whether we must inevitably go along with it.”
While I disagree with most of what Evans-Pritchard writes in his column, I also realise that NC is not the appropriate forum for a battle-of-the-nerds-style dispute on European affairs. Suffice to say that I recommend reading another column in the Telegraph that I judge to be informative and balanced fairly, “What is this place called Europe,” by Adrian Michaels. Furthermore, Evans-Pritchard refers to a recent report by the Brussels based think tank Bruegel. Bruegel is a pro-European outfit that produces high quality papers and its most recent report is no exception. While Evans-Pritchard quotes from the Bruegel Report are correct, it deserves to be pointed out that Bruegel’s situation analysis of the current state of EU affairs is pretty damning but that its recommendations nevertheless are squarely in support of further European integration as a means to overcome existing problems.
A lot of the current excitement about the EU in Britain stems from the up-coming Irish referendum on the EU Lisbon Treaty. If the Irish vote yes on 2 October, which seems plausible but by no means is certain, the new Treaty should normally enter into force pretty soon thereafter. The new Treaty would grant the EU new powers in many policy areas and provide the Union with a new political impetus. It is reasonable to assume that EU integration would gain new momentum with the new Treaty in force, much to the chagrin of EU sceptics.
In parallel, the financial crisis has demonstrated that the current EU framework for banking and financial services regulation and, also, supervision is inadequately equipped to deal with the crisis. Both the underlying legislation and the supervisory structures need reform, which most probably will entail further EU integration. Work in this area has already started when the European Commission in the spring proposed a new EU structure for financial supervision that would lead to a blend of national and EU bodies and competencies with more powers brought up to the EU level. In addition, the European Commission earlier this year put forward proposals concerning hedge funds and private equity firms. These proposals, and other similar initiatives, have been severely criticised by the UK Government and by the City who have begun extensive campaigns to have them watered down.
The fact that a newly elected European Parliament took office in the summer carrying with it, it many cases, political pledges to rein in “casino capitalism” through EU policy initiatives constitutes another element that working against the City. For instance, the draftsperson on the proposed EU Directive on hedge funds and private equity is a French socialist who does not think that the EU Commission’s initial proposal goes far enough. We can thus be looking forward to an interesting set of exchanges in Brussels in the coming months. Another contributing factor that is working against the City is the fact that the EU Commission is being renewed and that it will have a new five-year political mandate that most probably will include new policy objectives, few of which are likely to be to the City’s liking. Lastly, both Germany and France are reported to be seeking the banking and financial services portfolio for their respective new EU Commissioners. The world view of the top EU banking official for the coming five years is thus likely to be considerably different from that hosted by policy-makers in Westminster and investors around Paternoster Square.
The chronic unease that most Brits feel towards European integration is thus likely to get worse, in particular if the Lisbon Treaty enters into force. British politics do of course reflect this fact and with national elections coming up on or before 3 June 2010, the political parties are seeking to position themselves on the issue of Europe in ways that will benefit them the most. The UK has already ratified the Lisbon Treaty through a vote in Parliament, despite calls for a national referendum to be organised, so the UK is thus barred from preventing the Lisbon Treaty entering into force. Paradoxically, however, the Lisbon Treaty contains a new provision that may come to play a significant role in UK politics and be regarded as a new opportunity by the EU-sceptics:
1. Any Member State may decide to withdraw from the Union in accordance with its own constitutional requirements.”
With the Lisbon Treaty in force, the road for leaving the EU has thus been cleared. The new Treaty that Evans-Pritchard describes as an “unwelcome revolution… being forced upon us” incidentally introduces an explicit right for Member States to leave the Club, should they wish to do so.
For the UK banking and financial services industry, Article 50 of the Treaty may become a tempting solution at a point in time when it finds itself stuck between a rock and a hard place. Outside the EU, the UK would be free of EU meddling and could transform itself into a new rainy Cayman Island right off the European mainland. It would be difficult, I believe, for UK politicians to resist calls from a UK referendum to leave the EU altogether, in particular as so many British politicians build their platforms on being lukewarm or hostile towards the EU. Under this scenario, a UK decision to leave the EU would be the logical conclusion of the EU moving towards further integration while the UK wants less or none of it.
However, significant parts of the UK economy rely on having full access to the EU’s Internal Market. The ownership of the leading companies based in Britain is generally spread thinly and across the globe. Those owners may have a thing or two to say about the UK retrenching and going it alone on the international scene, without guaranteed access to the EU markets on favorable terms and without any say in how future EU policies are shaped.
The Director General of the Confederation of British Industry addressed the issue of the UK Industry’s dependence on the EU and the malaise concerning further EU integration this way in a speech:
“Europe, and the European Union, are critical to the success of the British economy. In sheer trading terms, the single market is by far the UK’s biggest trading partner. Over 50 per cent of Britain’s exports go to the EU, more than three times those to the US. And although everyone is very properly preoccupied with the rapidly growing markets of China and India, the fact is that these markets today represent just about a fiftieth of our export and import markets compared to the EU.
It’s clear that British business has a real interest in the efficient workings of the EU, and that today’s governance arrangements are a long way short of perfect. It’s also clear that until the matter is resolved one way or another, the treaty debate is not going to go away. Europe’s leaders will just go on gazing at their navels, engaged in endless and irritable internal debates, and ignoring the big issues and opportunities that Europe is facing in the wider world today. So it would be good to get this out of the way, if it could be done on the right terms.”
The problem is however that Britain is not able to dictate the terms and has, by the way, failed to provide any viable alternatives to its European Partners.
Evans-Pritchard briefly touches on the what IF the UK was to leave the EU: “Let us be honest: UK withdrawal would be traumatic, altering the political chemistry of Europe in unpredictable ways”. I agree with this, a UK withdrawal would be traumatic – for the UK. The EU would be different and would not be able to claim to be speaking on behalf of the whole of Europe any more, but the Union would get over it. The UK was not part of the EU for the first 20 years of its existence and that was not problematic. The UK is not a member of the Euro-zone and its geographical position makes a withdrawal easy to execute in practice.
To conclude, if the Lisbon Treaty enters into force with more and deeper EU integration as result, much of which will concern the banking and financial services industries, it will be interesting to observe whether political momentum in the UK is created to leave the EU altogether. Should this be the case, the City will have a difficult choice to make. It could go either way, really.