BrexitCentral: Can the EU step up to a win-win Brexit outcome in financial services?

In well-run and accountable democracies, citizens’ conflicting interests can be reconciled in accountable national assemblies to achieve trade arrangements best for the whole economy. With Brexit negotiations in full flow, the EU’s systems are being put to the test. The UK has a legitimate interest in whether EU institutions are sufficiently responsive to the EU public as a sensible counterparty for negotiations, or whether more direct negotiations with democratically elected representatives of member states are now required to achieve a win-win outcome.

The EU and its 27 remaining member states have rightly identified the need for free trade in goods with a post-Brexit UK. The UK trade deficit makes the need for frictionless goods trade a no-brainer for the EU27. The absence of such an arrangement would be damaging and costly.

Why the equally obvious benefits of mutual recognition in financial services, based on a recognition of each other’s legal regimes provided they reach equivalent high level outcomes, have yet to be acknowledged, is puzzling. The UK Chancellor, Philip Hammond, proposed in his recent speech some form of Enhanced Equivalence arrangement for financial services along these lines, pointing out that the costs to EU citizens by not doing so could run to the tens of billions. Such amounts vastly outweigh any small perceived benefits in terms of jobs in a handful of western member states, even for those member states themselves.

Yet the EU’s federal institutions do not seem to acknowledge or debate such fundamental matters. Member states, meanwhile, appear to place inordinate reliance upon Brussels to analyse the issues for them. The danger is that the Brussels institutions will seek to protect their priorities in such a way that the overall ‘EU’ approach is insufficiently responsive to the interests of the EU electorate. That would lead to a lose-lose result, which would be inconceivable were the democratic processes to be operating normally.

Enhanced Equivalence, being based on existing EU legal concepts, is fully compatible with EU values and its red lines. It takes the existing EU equivalence concept, fills in the gaps and makes it mutual and binding. It supports a sovereign-to-sovereign relationship already in existence in EU law and in application with numerous countries around the world, including the US, Canada, Mexico and Singapore.

The reasons given for EU unwillingness to enter into a financial services deal do not stand up to scrutiny. One of the proponents of such a view, attempting to speak for the EU as a whole, is France’s Finance Minister Bruno Le Maire. He said a financial services deal would conflict with the EU’s requirements for financial stability and effective supervision.

However, this ignores the fact that the EU already has negotiated equivalence-based arrangements with the US for the most systemically risky portion of the market, clearing houses, and has similar arrangements in place with many financial sectors across the world covering a whole patchwork of financial services provision. It has not previously been suggested that financial stability is at risk, and indeed several US clearing houses operated with EU customers throughout the 2007-8 crisis without hiccup.

To read Barney Reynolds’s piece for BrexitCentral in full, click here.

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