The EU has always suffered from unreconciled tensions between the interests of member states and of the EU itself. Across the EU27, the interests of citizens are in securing a free trade deal with the UK across all sectors post-Brexit. If member states were to negotiate directly, then their own democratic national assemblies would judge competing interests for the benefit of their people. By contrast, with Brexit, the Commission controls the negotiations and member states place huge reliance on its analysis.
This prompts the question of whether Parliament and Council can operate independently, and balance democratically the economic interests of the EU27 citizens.
To date, it would appear the perceived interests of a small handful, or even fewer, of EU27 member states are being prioritised at the expense of the rest.
A deal providing for frictionless trade in goods is a no-brainer. The EU27 is now pursuing this. Given the UK’s trade deficit such a deal is largely one-way in favour of the EU27.
What is also clear is that a services deal, particularly a financial services deal, is also a no-brainer. The alternative, of not having such a deal, would mean costs run into the tens of billions, resulting in a reduced ability for EU citizens to borrow, and lower pension and investment returns. Unilateral mechanics at the discretion of the EU would trigger such consequences and amount to no deal in this context. But the Brussels bodies have not identified this fact, let alone debated it openly. As a result there is a concern as to a failure of democratic accountability, to the detriment of all.
While many may wish to preserve the passport which facilitates cross border UK-EU trade in financial services, this raises EU constitutional issues. However, it can easily be replicated in another form after Brexit. Philip Hammond, the UK Chancellor, has proposed exactly that, with an enhanced version of the existing EU equivalence regime that already underpins trade with the US, Canada, Singapore and others. I have published a detailed proposition showing how this can be done – by the EU and UK agreeing to binding two-way access for financial services providers so long as the laws and regulations of each jurisdiction achieve similar high level outcomes, in conformity with the current approach to equivalence. Those outcomes would be based on international standards where they exist. Where they do not, the technocrats would agree the outcomes in good faith. Minor enhancements would fill in a limited number of gaps within the existing equivalence framework. The agreement would provide for collaboration mechanics and commitments to maintain recognition, subject to notice periods. The approach would be topic-by-topic. Either party could decide not to seek access for a particular topic. An independent arbitral body would oversee compliance. There would be no sacrifice of sovereignty. The EU would merely agree to apply its own laws predictably, in a system which has been tested for a number of other jurisdictions, from the US to Singapore.
Accessing the global financial markets in the UK in this frictionless manner will not be detrimental to the EU. The UK provides a safe and efficient marketplace for global finance, managed in an apolitical manner. The objections so far offered to such a simple arrangement are bogus. Bruno le Maire, the Finance Minister of France, raised concerns on the basis of systemic risk and supervision. However, neither topic has been raised as an obstacle to the equivalence-based recognition of US clearing houses, which are at the centre of a systemically risky web of arrangements. And the EU already relies hugely on the UK’s supervisors, which are amongst the best in the world.
The objections are clearly not made for the benefit of the EU27. In August 2010 French President Nicolas Sarkozy offered 20 year tax breaks to tempt the world’s biggest banks to move their headquarters to Paris. Some may see Brexit as an opportunity for another swipe. But the markets are sticky.
There have only been four global financial centres in the last 400 years. The first two, Antwerp and Amsterdam, were destroyed by war. London suffered huge damage in the WWII, permitting the rise of New York. Brexit presents no such existential event. Tussling for small spin-offs at the expense of the welfare of one’s citizens does not make sense. Recent ifo analysis for the German Finance Ministry shows the gain of a small number of jobs in finance would be vastly outweighed by the costs of not having a trade deal with the UK upon Brexit.
Yet for some the religion runs deep. They seek to control financial flows, often disguising this as being required to protect the euro or “their” markets. Christine Lagarde, a former French finance minister before becoming Managing Director of the International Monetary Fund, with whom I spoke on a platform in New York after the formation of ESMA, indicated just how deep the ideology goes. “I can’t tell you”, she said, “what it means to me for the City of London to be regulated in Paris.” Nicholas Sarkozy claimed the purpose of the financial markets is to serve (French) industrial policy. But the markets cannot be straightjacketed in this manner. Money moves to where investors can determine for themselves how to deploy their capital. A controlling approach would be of inordinate detriment to EU citizens.
Clearly this is not how democratically accountable structures operate. Democracies do not make their citizens suffer needlessly for their leaders’ ideology, but choose as leaders those who put the interests of citizens first. If the Brussels institutions are unable to do this for the EU27, then the long-established and well-tested democratic assemblies in each of those states should address the matter directly with the UK so that a truly win-win outcome can be achieved.