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Monday, August 20, 2012

The UK and banking union: could the Coalition go for a 'single market lock'?

We also have an op-ed in today's Times, in which we look at forthcoming proposals for a 'banking union' in the eurozone. We urge the UK government to explore creative solutions, including what we call a 'single market lock':
In the desperate search for the euro’s saviour, all eyes have turned to the concept of a “banking union”. Regardless of whether it is a good idea or a bad idea, banking union will undoubtedly cut not only to the heart of a key UK industry — financial services — but also the wider issue of Britain’s future in the EU in the face of further eurozone integration.
However, the typical response of City people, or those in Whitehall for that matter, is confused. On the one hand they love the idea, seeing it as a backstop for shaky eurozone banks that threaten City firms and the British economy alike. On the other, they fear it on the basis that the UK could be left without “a seat at the table” in Europe, meaning that the City would be forced to accept rules written for and by the eurozone. This hardly makes for consistent policy.
A banking union effectively involves three steps: a single rulebook, a single supervisor and a joint backstop (including a deposit guarantee scheme and resolution scheme with a wind-down mechanism). Given the Continent’s vastly differing banking systems and interests, achieving these three steps will be hugely challenging — and probably take years.
Still, the European Commission will kick-start the process this autumn by tabling a proposal to make the ECB the single financial supervisor for eurozone banks, for which there is broad support. While David Cameron has ruled out the UK taking part, with zero chance of it being accepted domestically, he has actively encouraged the creation of a banking union on the condition that “British interests are secured and the single market is protected”. The problem for the UK is that a banking union, if developed to its logical end point, will almost certainly cut across the single market in financial services.
For Britain and the City there are two main risks, the extent of which are unknown at present. First, companies doing business in the euro area could be required to be supervised by eurozone authorities. The ECB has already demanded that City-based clearing houses establish themselves inside the eurozone to be allowed to clear transactions in euros, something the UK has challenged at the European Court of Justice. If such practices become part of a banking union, the City would face a series of hurdles to doing business in the eurozone. The second risk is that the eurozone 17 start to write banking and financial rules for all 27 EU states, using their in-built majority in the Union’s voting system to implement them via the EU institutions.
Here, it is vital to understand the political incentives created by a banking union. To avoid banks free-riding on German taxpayers, Angela Merkel, the Chancellor, is likely to insist on any financial backstop being backed by perfectly harmonised regulations — for example, on capital requirements or bonuses — with little or no national discretion. This could well spill over to Britain, as the eurozone is unlikely to accept an uneven playing field within EU financial services, with the UK having few ways of blocking eurozone-tailored regulation being applied to the single market, even if detrimental or discriminatory.
So what should be done? First, Britain needs a consistent diplomatic position: it cannot both actively call for a banking union and implicitly threaten to veto it, as is the case at present. Second, to avoid the new structure — including the ECB — stepping into single-market territory, the UK needs to work with EU allies to make sure that it is fully accountable. The division of labour between the ECB and the London-based European Banking Authority needs to be made perfectly clear, for example.
However, given the stakes, Britain also needs to think creatively about new institutional arrangements with Europe, not only to guarantee the City’s position as a global entry point to the single market — offered by continuing EU membership — but also to create a space in Europe for those countries not intent on joining the single currency, and also for those that may choose to leave. There are several potential solutions. For example, non-euro members could be given the right to appeal against any proposal at the European Council, where all countries have a veto, if it is deemed to undercut the single market or be discriminatory — a “single-market lock”, if you will.
Such a move may require treaty change, but so will the steps towards banking union beyond the single eurozone regulator. Furthermore, if pitched right, such proposals could draw support from countries on both sides of the eurozone divide, including Sweden, Germany and Poland, given that the motivation would be to protect the single market.
A eurozone banking union is still shrouded in unknowns. But the City, even if it wants things to stay the same, may have to accept that things will have to change.


Rik said...

Imho totally unlikely hat an EU bankingunion can be created fast when the UK will have to be part of it. And fast is required when it has to play a role in the Euro-rescue.
The UK has no incentive like saving its currency and very likely completely different interests than the EZ countries.
Who have enough points to clear between themselves, combined with the fact that Barosso's boys want more power but donot have any apparatus to run the show effectively the only one that can relatively quickly is the ECB.

Simply waisting precious time imho, like so many times before.
It is simply go fast go EZ (well even then it would be difficult)and go ECB. All other things will give massive delays.

Rik said...

A point I donot see in your post.

Of course there is a political issue, however when it is not EU law (like a EZ solution), it is simply legally from a lower order. Any collision with common market (EU law) has to be decided in favour of the EU law (which doesnot change).
Of course showing again what a legal mess this is and we will end up with (simply not stable).

Rollo said...

However much we enjoy knocking the banks, it would be wise to remember that the finacial sector and the City is about the only part of the EU economy which actually pays for itself, makes a profit, pays substantial taxes. It is immensely valuable and is the target of jealousy and hatred throughout Europe. Paris and Frankfurt/Bonn etc would dearly like to wear London's crown, and the EU will do all it can to translate the centre of the financial world to Germany. This banking union must be resisted. We are already seeing a drain of London jobs to New York.

Anonymous said...

Again, more Pro-EUSSR, pro-political elitism disguised as Euro-realism from Open Europe.


Anonymous said...

The City an entry point to the Single Market? There isn't really a single market in financial services, and EU membership is not needed for New York, Tokyo etc to deal in foreign currencies.

The EU treaty also commits to free movement of capital, so a post-EU City would not lose out.

'True Blue'

christina Speight said...

Two anonymous above (not me!) after the usual blockbusters from Rik. Unless he can be persuaded to temper his verbosity I'll not bother coming on here at all.

This article however has overlooked that elephant over there except for a tiny nod in its direction - British opinion.!! [--financial supervision "with zero chance of it being accepted domestically"). Meanwhile the febrile state of opinion has total withdrawal well in the lead NOW, and Cameron would be crucified if he gave anything away at all on this without a referendum. Even that europhile Clegg would be scared of trying it on!

Why is Open Europe so wishy-washy in its solutions. Our price for not OT beting the banking union should be a full opt-out option on all EU decisions together with a restoration of our Veto on all areas from which it was withdrawn by Lisbon. Simpler just to get out but we should veto the banking union first.

Denis Cooper said...

"... Britain also needs to think creatively about new institutional arrangements with Europe ... to create a space in Europe for those countries not intent on joining the single currency, and also for those that may choose to leave."

Two years too late for that: Cameron should have insisted on a package of such EU treaty changes in return for agreeing to Merkel's demand for a radical EU treaty change to permit the establishment of the ESM, back in 2010.

But he didn't; he simply agreed to what she wanted, formalised through European Council Decision 2011/199/EU of March 25th 2011.

He could have insisted that there must be a mechanism for a country to make an orderly withdrawal from the euro, while staying in the EU, but he didn't.

And he could have insisted that the non-euro EU member states must be relieved of their current legal obligation to join the euro at the earliest opportunity - only the UK and Denmark have treaty "opt-outs".

And he could have insisted that new countries would no longer be required to commit themselves to joining the euro as a condition for their accession to the EU, but he didn't, and last December he agreed to that obligation being imposed on Croatia.

And there's maybe half a dozen other EU treaty changes he should have demanded to protect the UK's long term national interests, but he didn't.

The Bill to approve that radical EU treaty change to which Cameron far too readily assented on March 25th 2011, getting nothing substantive in return, has already been through the Lords and will have its second reading in the Commons on September 3rd; an e-petition calling for a referendum is here:


Idris Francis said...

In a Titanic context, Open Europe's long, convoluted, hopelessly optimistic and unrealistic analysis of how to avoid cataastrophe woud read:

1/ Install intercomms between all areas of the ship that do not have them.

2/Strip down, examine and re-assemble the bilge pumps.

3/ Assemble all crew members in the dining room for a 3 day course in megaphone use, foreign languages, ladder safety, ropes and knots.

4/ Plan menues for next 3 weeks.

5/ Requisition from the Promenade Deck shop prizes for the bridge and poker players.

In other words, too little, too late, in a situation that should never have been allowed to happen, brought about by incompetence and ego and forgetting completely that any moment now everything is going to go belly-up.

There is instead only one rational decision to take - get off the sinking ship while we still can,