The impact of Brexit on the financial services in the UK
On June 23rd , 2016, the United Kingdom of Great Britain and Northern Ireland (UK) organized a referendum to question British citizens whether they want the UK to continue to be an EU Member State or not. Citizens of the United Kingdom decided by a majority of 52% for the withdrawal of their country from the European Union.
However, the results of the referendum were not the same in all countries that are part of the United Kingdom of Great Britain and Northern Ireland. In England, 46.8% of the citizens with a right to vote opted to remain in the EU, while 53.2% voiced the desire for the UK to withdraw from the EU. In Wales, the results were similar: 48.3% of the votes were in favour of remaining in the EU, while 51.7% were in favour of withdrawing from the EU. In Scotland and Ireland, the results were significantly different, most opting for staying in the EU with a majority of 62% in Scotland and 55.7% in Northern Ireland.
The Treaty of Lisbon (2009) introduced the EU withdrawal procedure, and Brexit is the first phenomenon of this type in the history of the EU. This also equates to the existence of some uncertainties as to how to proceed when a member state wished to leave the EU. Under Article 50 of the Treaty of Lisbon, when a Member State of the European Union decides to leave the EU, it will negotiate an agreement to establish itself the conditions for withdrawal, as well as the framework for future relations with the Union. The agreement will be concluded by the EU Council, on one hand, and, on the other, by the State that decides to leave the Union, according to art.18 of the Treaty of Lisbon, which means that the process of negotiation will be similar to negotiations with any other third party.
The exit procedure from the EU starts with an official notification of that state to the EU Council and may extend for a maximum of two years. Throughout this period, the withdrawing Member State will continue to abide by EU Treaties and Laws but will not take part in debates or decision-making within the European Council or the EU Council. UK is an EU Member State since 1973, and withdrawal from the Union is equivalent to the withdrawal of a major power within the EU’s economic engines. UK is a permanent member in UN Security Council, NATO member state, World Trade Organization, Organization for Economic Cooperation and Development, G7, G20.
In the EU single market (sometimes referred to as the internal market), people, goods, services and capital can circulate as freely as in the territory of a single country. Mutual recognition plays a central role in removing barriers to trade.
EU citizens can live, study, work, buy products, spend retirement years in any EU country, enjoying products from across Europe.
No national barriers
In order to create this single market, hundreds of technical, legal and bureaucratic barriers to the free trade and free movement between Member States have been eliminated. As a result, companies have expanded their operations. Competition has reduced prices and diversified supply to consumers. In Europe, phone calls cost far less than 10 years ago. Airfare prices dropped significantly and new routes were inaugurated. Individuals and businesses can now choose their electricity and gas suppliers. At the same time, with the support of the various competition regulators in Europe, the EU is making efforts to ensure that these new freedoms do not undermine equity, consumer protection and environmental sustainability.
Great opportunities for businesses
European businesses selling their products and services in the EU have unrestricted access to about 500 million consumers, thus having a good chance of remaining competitive. The unique market is also attractive for foreign investors.
Economic integration can be a major asset in times of recession, allowing Member States to maintain their trade relations rather than resorting to protectionist measures that would result in a deepening of the crisis.
The financial services market is a special case. To avoid a repetition of the 2009 crisis, the EU is trying to build a safer and stronger financial sector by taking measures such as overseeing financial institutions and regulating complex financial products and asking banks to hold more capital. The creation of the banking union has transferred supervisory and resolution mechanisms from several Member States across the EU. There are also plans to achieve a union of capital markets, aimed at:
- reducing the fragmentation of financial markets;
- diversifying funding sources;
- strengthening capital flows between EU countries;
- improving access to finance for businesses, especially for small and medium-sized enterprises.
The exit of Great Britain from the European Union, abbreviated Brexit, will bring about a six-fold decrease in EU GDP but will significantly increase the surplus of the Union’s trade balance. According to Eurostat, in current prices, the UK had reached a GDP of 2.580 billion euros in 2015 from the EU’s 14.708 billion euros in 2015.
Practically, the Union will lose its second largest economy (Germany is over € 3 billion a year), but it has to be taken into account the massive pound fluctuations, which increased two years ago at record levels and then lost ground gradually until 2016.
If France also figured in 2015 with just 2.181 billion euros, let’s remind ourselves that in 2011 the situation was quite different, with the Hexagon at 2.059 billion euros and UK at just 1.876 billion euros.
It should be noted that the average standard of living in the EU will not change significantly in the absence of the UK. The UK is only 10th in 2015 as GDP per capita (concerning purchasing powers), compared to a 109.7% EU average and slightly above the 106.3% of the Eurozone in which recently entered several former socialist states.
This is not a surprise as Britain figures within the work productivity top per employee with only 34.9 euro per hour worked, much after countries such as France (46.9 euro / hour) or Germany (42.5 euro / hour) but just above EU average, Italy (33.2 euro / hour) or other slightly bigger state, Spain (31.6 euro / hour).
But it is certain that without the United Kingdom, the EU will no longer (unless with great costs) aspire to the role of the most important actor in the world economy which the European Union had proposed to itself given the population, the level of development and, if you wish, the historical tradition. First place which EU already occupied if we check the levels of trade and foreign direct investment, even without having the highest GDP (after some calculations, EU surpassed both US and China in 2015 if we look at the standard purchasing power parity). As a result, the wuro currency will no longer be the most important currency used in transactions.
EU goods trading – a relief without the British
If we look at the foreign trade balance of UK in 2016, the data available after 11 months shows a 50-50 distribution of UK trade flows with EU countries and non-EU countries. Which shows a lower integration with the EU economy (for reference, Romania, a newcomer, has is more than three-quarters of trade with European partners). In addition, a five percent cut last year can be seen, both on the export side and on intra-EU imports. Where the negative balance of the British has passed the threshold of 100 billion euros.
Attention, however, to the fact that relocation of trade to countries outside the Union does not seem to be a successful action. Despite the devaluation of the pound sterling, which should have helped exports and discourage imports, the negative balance of British trade increased by 36%.
To account for the extra-EU relationship, the decrease in exports was more than triple (-17%), while imports advanced by eight percent. The result was a true exposure to the deficit with non-EU countries, deficit grew more than two and a half times the same period of the previous year, and has steadily approached the absolute level recorded in exchanges with colleagues in the EU.
For EU commodity trade, the UK exit from the Union will only significantly improve the end result. Between January and November 2016, the EU exported $ 1,581.2 billion, to which the UK contributed only 11%, and imported € 1,561.2 billion (of which the UK checked 17%), obtaining a small surplus of € 20.2 billion.
If the recalculate with a non-EU UK, the Union surplus of only 27 states would increase 5.5 times to 110.9 billion euros. If we also add the effect of Britain’s transition to the non-EU category, we add the 104.8 billion current intra-EU deficit now and the EU trade balance goes to 215.7 billion, i.e. more than ten times higher than the one now recorded by Eurostat statistics.
Net contribution to the Union’s finances
Regarding the much-cited UK net contribution to the EU budget, beyond the 2014 confirmed data showing simplified payments of € 14 billion and used amounts of about € 7 billion, it should be noted that the situation is quite different from the one covered on the occasion of the referendum that led to Brexit. If we report the seven billion to the above amounts or to GDP, it does not show much.
In fact, Britain is the developed Western state that paid the least in relation to its own Gross National Product to support the functioning of the European Union. The average results for the financial year 2007 – 2013 show that the UK had negotiated a special position within the EU, which led to the following positioning:
The best part is that a PricewaterhouseCoopers report in 2016 shows that the Brexit effect on British financial services, which accounts for 4% of the labour force and provides 12% of the budget revenue, will amount to -2% of the value added by the economy in 2020 and -3.3% in 2030. Year in which the effect will be a loss of € 8 billion at 2015. That is, simplified over the 7 billion annual cost of EU membership mentioned above.
On the other hand, although the outflow of the UK from the EU will significantly weaken the economic strength of the Union, the impact on the British economy is announced to be much tougher. Of course, the British paid considerable sums to support the EU budget but did not think of the costs they would incur after leaving the Union.
In short, Brexit will be an unwanted lose-lose situation where the biggest loser seems to be the UK.
The outcome of the United Kingdom referendum of 23 June 2016, which sent shockwaves across the nation, in Europe and obviously in the industrialized world, was generally interpreted as a manifestation of a new wave of “populism.” The British Government certainly did not take into account a “NO” of continuing EU membership when convening the referendum. David Cameron’s cabinet was very unprepared for Brexit (Britain’s out of the EU) and had no plans to implement Brexit. Opinion polls, financial markets, and even betting markets that had anticipated a system / establishment victory, as in the US presidential election of November 2016, proved to be wrong.
The unexpected majority for “departure” and the process that will eventually end the UK membership of the EU initially produced a number of substantial comments and analyzes.1 But much remains to be explained and Brexit is just the symptom to a deeper, wider and more complicated problem. Brexit’s perspective is not difficult to digest in the UK but also in Europe. This perspective is an existential challenge for the European integration process. Angela Merkel remarked in response to Brexit: “We have to face the consequences of [Brexit] and analyze the future of the EU”, adding “Citizens will only accept the EU if it will allow them to prosper.” 2 Following Brexit, and after Donald Trump’s election, the EU seems to be the only viable and powerful defender of the principles of a liberal international order.
This chapter analyses the determinants and consequences of Brexit, but also some more general and negative views on the previous development and the future configuration of the EU. We discuss the reasons that prompted the British electorate to vote in favour of Brexitu and the implications of this outcome on the country’s economic well-being as well as the other EU Member States.
We interpret Brexit as an extreme situation of more general skepticism about European integration and therefore an opportunity to reflect on the interaction of narrow and short-term political perspectives with the context of the economic, cumbersome and gloomy policy of the EU.
Theresa May, the prime minister of the new British government formed after the result of the referendum that led to David Cameron’s resignation, tried to minimize speculation about Britain’s negotiating strategy and the government could choose to ignore the British people’s mandate. She has repeatedly stated that “Brexit means Brexit,” but this obvious tautology did not help citizens or markets to better understand what could follow. The result of the referendum initially triggered a widespread fear of an immediate economic collapse, comparable to the consequence of the Lehman crash in 2008. Stock markets fell instantly all over the world and the British exchange rate depreciated. The stock market in the United Kingdom returned, and growth in the second half of 2016 was surprisingly strong
Realistic assessments of the purely economic costs of the UK’s outflow from the EU do not generally provide for a catastrophe that justifies the dramatic reactions that emerged right after the Brexit referendum. The significant decline in stock markets could have prompted a much wider and deeper disruption, perhaps because businessmen in the UK (if not the majority of voters) were convinced by Stay, the main theme of the campaign, and the far too dramatic estimates Brexit costs formulated by the United Kingdom Treasury (2016 a, 2016 b) before the election. The UK Treasury summed up these costs to a false figure that Brexit would cost each UK household 4,300 pounds annually by 2030. These figures combine the negative view of Brexit’s long-term consequences with a dramatic warning on the gravity of the shock immediately, with a 3.6 percent decline in GDP after 2 years and the loss of 500 000 jobs (or, in the event of a severe shock, a 6% fall in GDP and 800 000 unemployed in addition).
The forecasts were largely formulated on “caeteris paribus” assumptions. UK Treasury publications seemed to have been politically encouraged because they did not allow a fiscal and monetary effort to balance the contractionary effects of the shock right away, while in fact the Bank of England cut rates and the new government announced a large expansion program In the long run, the Treasury figures were based on a gravitational pattern of commercial effects that could have overestimated the magnitude of losses and underestimated the possibilities of creating a new type of transaction (Blake, 2016). Instead, the most optimistic estimates only considered commercial effects (which barely exceed one or two percent), even though the key element of the Brexit campaign referred to migration restrictions.
Not just the predictions are “wrong”, but also the fact that the models used do not cover all the uncertainties that appear in reality. As a result, it is easy to conclude that economists are not good at predicting and that the popular or populist suspicion of experts is fully justified. The “Stay” Campaign, based on fear-inspiring Brexit stories – called the “Fearful Project” – wrongly calculated its own impact on voters’ opinion in the UK. As with US presidential elections, the final stages of the campaign have led to rising stock market prices with Hillary Clinton’s likelihood of winning the election; but they grew even more when voters chose Donald Trump. No major catastrophe occurred immediately after the referendum. Recently, markets have recovered, and the UK economy is doing well, which is, at least in part, due to depreciation of the pound. This does not mean that Brexit has a small impact because in the real sense Brexit has not yet happened. The formal mechanism to discuss the United Kingdom’s departure from the EU will only start when the British Government declares its intention to withdraw by invoking Article 50 of the EU Treaty.4 The institutional framework in which Brexit will take place remains nebulous. As discussed below, joining the EU means far more than free trade, but the British government has not yet announced any plan on how to pull the country out of deep integration into the EU’s single market.
Various options have been launched to manage the UK’s future relations with the EU, including adherence to the European Economic Area (which would require payments and acceptance of freedom of movement) or a trade and investment treaty of the kind currently negotiated by the EU; and Canada. The first option is attractive to the financial interests of the City of London, which would like to preserve passport rights in the EU, but it is unlikely to satisfy the voters and politicians who supported Brexit. The EU is also reluctant to negotiate new trade treaties, and there is even controversy over the Canadian treaty and the proposed TTIP / Transatlantic Trade and Investment Partnership. In order to complicate the problems, alternative trade agreements cannot be negotiated while the United Kingdom is still an EU member and certainly not before the UK invokes Article 50.
The economic check of what Brexit means is actually going to occur, the policies being contradictory. How the other EU Member States will respond – and the extent to which voters in these countries will have similar dissatisfaction – is also unclear.
The UK has many peculiarities that distinguish it from the continental EU member states. The UK does not have a proper written constitution or identity card system, the labour market is fairly under-regulated, financial markets are much more developed than continental central bank systems, and the social state is less generous, but more accessible than continental systems based on contributions.
The British view of the EU differs from that of other members, the United Kingdom interpreting its interests as fundamentally divergent to those of most European continental countries. The UK tradition is less regulated, hostile to the idea of European fiscal centralization, less concerned with the fate of the agricultural sector and more dependent on financial services.
The structure of the EU’s economic policy framework was established long before the United Kingdom’s accession in 1973 and is based on the model of European national states, where market interactions are framed by a universal institutional infrastructure. The EU wants a cross-border market competition and prevents inefficient competition among policy-makers, but at the same time recognizes that markets need to be supervised. Antitrust policies are needed to prevent monopolistic inefficiencies. Regulating and standardizing product specifications contributes to ensuring that market participants are properly informed. In all advanced countries and in all EU Member States, including the United Kingdom, social assistance systems protect individuals from the inherent risk of participating in complex and broad market interactions, fiscal and monetary policies compensate for aggregate demand fluctuations, and deposit insurance prevents running bank deposits.
The challenge for the EU is to maintain and develop these safeguards in situations where markets are crossing national borders. This requires complex compromises because even if the market structure and institutional frameworks are generally similar between countries, traditions differ, particularly with regard to social policies and the labour force, which remain a pillar of industrial and post-industrial national states. The Union’s increasingly narrow trajectory uses economic instruments to promote stability, cohesion and economic growth; and emphasizes cultural convergence around democratic common values. For continental European countries, integration was primarily intended to heal the scars of the war and to eliminate the possibility of a future-armed conflict. The British perspective on the need for regulatory and redistributive policies as well as on the historical process of European integration differs significantly. A people and political leaders of a country who, in its relatively recent past, did not experience dictatorship, revolution, or serious macroeconomic instability, is fit to appreciate development rather than stability or cohesion. It is therefore not surprising that the United Kingdom has abandoned the single European money project designed to foster market integration and price stability, but also to strengthen identification with Europe.
The UK has strongly supported the expansion of the EU framework, rather than its deepening. The logic underpinning this strategy was that joining heterogeneous and relatively poor countries in Central Europe would make it more difficult to design a stronger and more coherent political framework on the one hand, and would dilute public support for the relative integration of foreigners on the other part. The UK rejected proposals to harmonize capital taxation. It also refused to sign the Social Charter accompanying the European Treaties, ensuring that social, labour and fiscal policies were allocated directly to the national level and were therefore exposed to increased social tensions. In most countries in mainland Europe, EU efforts to harmonize and curb these policies tend to be unpopular among left-wing parties, but they get support from businesses and elites. In the United Kingdom, conversely, EU regulations on work program and trade union rights have proved to be sufficiently burdensome to attract criticism as they unduly constrain individual freedom. The fiscal component of the EU’s economic policies is underdeveloped (the budget is less than 1% of EU GDP) and is unbalanced, meaning that the Common Agricultural Policy still swallows almost 40% of the global budget (see Figure 3.1) . Focus on agriculture has its roots in the history of France, Germany and other European continental economies. In the interwar period, farmers around the world saw their incomes fall as new areas began to produce. Food prices and then farm prices collapsed. Over-indebted employees lost their farms, and the banks to whom they owed money cut their credit lines. Remedies in the interwar period – trade protection through tariffs and quotas have proved ineffective. The Primary Fiscal Mechanism of the European Economic Community, the Common Agricultural Policy, set prices for farmers and ensured a system of subsidies. Managing the rural decline has proven to be the most important political payment of the European process. In contrast, the United Kingdom did not need this peer-care system, with only 9.2% of agricultural employment in 1900 and 4.1% in 1958. In France, agriculture accounted for 42.2% of employment in 1900, a still high 22% when the European Economic Community was established in 1958. At present, only 2.8% of French workers are employed in agriculture (2010). For Germany, equivalent figures are 33.8% in 1900, 16.1% in 1958 and 1.6% in 2010; While in Italy they are 58.7%, 32.9% and 4.0% (Wingender, 2014). A reform should be based on a significant reduction in the importance of farm transfers.
The UK has consistently pursued an uninterested or semi-detached position with regard to European fiscal integration. The issue of Europe’s fiscal capacity emerged during the Greek rescue package in 2015 when Prime Minister David Cameron refused to participate in funding through the European Financial Stability Facility, and Chancellor George Osborne noted that “the eurozone must pay passes his own bill. “Cameron totally assimilated Margaret Thatcher’s” money back “lesson in the 1980s: Britain needs to defend itself against budget demands in Europe. At the same time, he and George Osborne were also impressed by the American economists who told them that a monetary union without a complete fiscal union was inherently unstable and that Europe could therefore only save itself through a quick conversion into a true tax union. As a result, Britain was in a difficult situation to argue in favour of an action to tax centralization that it had previously tried to undermine.
The fiscal debate was an increasingly incoherent policy that highlighted the anomaly of British stance. As signatories to the Maastricht Treaty or, as a consequence, all EU members who did not give up (Great Britain and Denmark were exempted) were eventually forced to join the monetary union. The euro area itself has no fiscal capacity – only the EU has. Thus, in an attempt to address the European debt crisis modelled on Alexander Hamilton’s early American system, Great Britain was preparing for the fundamental choice as to whether it should be part of an ever closer union by Hamiltonian directions.
There is another key area of policy inconsistency, in which the UK and continental Europe seem to have conflicting traditions and interests. Financial services are an important component of the UK economy (see Figure 3.2). As far as value added is concerned, the share of financial services in the UK economy has increased in 2000 but has contracted to some extent after the financial crisis. One of the first moments of tension between David Cameron and the other heads of European governments took place in December 2011 when Cameron rejected proposals to amend the treaty because they did not provide adequate guarantees for the City of London.
There are two conflicting views on the future of UK financial services and their interaction with the European market. In an interpretation, Britain is successful as a European financial center but needs access to the European market.
The easiest way to obtain this access would be to transfer institutions from the UK to Europe, but this would require the UK to comply with the four European freedoms: free movement of goods, services and capital and free movement of persons. Some argue that there is no logic for this association and that many societies in a globalized world are open to the first 3 forms of movement, but not to the latter (Pisany-Ferry et al. 2016). Alternatively, in the other vision, the future of the United Kingdom is seen as a provider of global financial services, and would be limited or constrained if it accepted the European regulations that would accompany the transfer. It could be based on the EU’s acceptance of a principle of equivalence through which US, Japanese and even Chinese financial institutions have access to the European market if their regulations are accepted as equivalent to those of the EU. This view is suffered by the fact that equivalence is now redefined, partly in response to the Brexit debate and partly reflecting a tendency for nationalism to grow in financial regulation. The “exit” option for financial services can also be based on the experiences of other small offshore financial centers: Hong Kong and Singapore depend on a good relationship with China, like Switzerland and Liechtenstein with Europe. In the future, Europe will probably react with skepticism and hostility to an attempt by the UK to build a freely regulated (and therefore risky) offshore financial centre to operate with and in Europe.
It is also questionable whether the focus on UK financial services reflects the aspirations of most of Brexit voters who have largely disapproved of London’s economic, financial and social liberalism, and is in favour of traditional values and not the brilliant dynamism of a mega- world city.
The political positions of the British electorate and the referendum vote did not really reflect the difficult relationship between the UK and the EU’s complex and nuanced approach to regulation and the market economy. Most British voters do not own capital directly and can simply ignore the indirect impact of market interactions on their well-being. Their decision, like the renaming of South Africa’s rugby team criticized by Nelson Mandela in the film Invictus, “was probably based on insufficient information and understanding of the perspectives.” Cameron’s initial move to hold a referendum on EU membership was triggered by concerns about the electoral competition of the Conservative Party by the radical populist party, UKIP (who has been involved in and promoted an international right-wing “right alternative” campaign “- the right alternative) based on news distortion and the propagation of misleading misconduct (Shipman, 2016).
The consequences of Brexit are potentially more dramatic for British citizens than they perceived when they voted. This is due to the fact that the United Kingdom is a highly globalized country in terms of its integration into capital markets (Figure 3.3) and large migratory flows (Figure 3.4).
Concerning trade integration, Figure 3.3 shows that the United Kingdom is comparable to other large EU countries. Since 2000, however, the opening of Germany has been highlighted in this group of countries of comparable size. Interestingly, the single currency, the expansion and the great recession, which are a challenge to the EU’s institutional structure and decision-making processes, are also associated with the more important role played by international trade in the German economy.
However, the construction of aggregate statistics does not help us understand the revolt against integration expressed in the results of the referendum. It is far more productive to analyze what kind of information is available and how to make their point of view known among individual voters.
In terms of referendum, how much trust do you have in the following categories of people?
To understand why many voters rationally chose “exit” despite the threat of potential global economic loss, it is worth recalling that some far greater individual consequences tend to be included in a global average of earnings or losses.
Economic integration opens the markets for foreign competition products and agents. Competition increases efficiency and reduces final product costs, but also destroys those producers who can provide relatively rare and expensive services in autarchy / economic independence. Removing barriers to imports generates widespread benefits, for example in the form of cheaper clothing, and curb damage, such as job losses for clothing manufacturers. Survey evidence shows that international economic integration is perceived as risky and that its attitudes are correlated with individual features compatible with the theory of competitive advantage (eg Mayda et al., 2007). In advanced countries with more generous welfare programs, highly qualified individuals are less in favor of immigration, perhaps because they, as relatively high-income taxpayers, feel threatened by the redistribution of poor migrants. The more intense foreign direct investment activity is also associated with satisfaction or dissatisfaction with the current job security of the respondent in the British Workers Survey analysed by Scheve and Slaughter (2004). They note that the time shift within a sector of direct foreign direct investment indicators that controls the aggregate cycle has an effect on job security perceptions, which is statistically very significant and roughly twice as strong as that of syndication, education and income.
Different views are imperfectly narrow aggregates on a single yes / no issue. In fact, leaving the EU appealed to Brexit supporters for a wide range of very different reasons. The coalition that won the referendum closely comprised pro-business, market-oriented voters who oppose the EU as a source of bureaucracy and regulation, as well as the elderly and the poor, who support social welfare policies and fear competition. It is not clear at all whether the Brexit supporters have agreed on many other things. Interestingly, Prime May expressed views closer to those of Brexit advocates who fear competition than retailers, but her government (drawing a serious reprimand from Germany) has highlighted plans for drastic cuts of corporation tax rates.
Let us now look at the information on which the vote is based. Many myths published by the British press and propagated by UKIP and other critics of the EU are collected within the Euromyths index, where European Commission officials patiently explain the rationale for regulations that are not as extreme as they are tempted to believe Eurosceptics through their information sources.5 The results of a YouGov poll contribute to resolving the Brexit choice of the British (see Figure 3.5), despite the fact that most financial experts and markets, but also most political leaders and democratic representatives thought it was bad for the UK.
Even among voters who voted for “staying,” the figure of those who expressed confidence in academics, economists, business people, the Bank of England, the International Monetary Fund and other political phenomena research organizations was only 30 percentage points higher than the number of voters who remained unconvinced in this expert advice. Among Brexit supporters, distrust dominates confidence by 30-60 percentage points, putting international organizations at the same level as sports actors, animators and champions; journalists, British and foreign politicians, gains almost unanimous mistrust of voters in favor of “leaving.” A significant criticism in the campaign was that experts were part of an international elite and supported globalization being prominent self-interested. It seems that the vote of the referendum was mainly motivated by individual feelings and that, probably as a result of obvious communication mistakes, voter information efforts were doomed to failure.
The methodology used was data collection, thought questionnaires addresses to bank employees, mid-level management within companies offering financial services and analysis of the interviews in mass-media with authorities in the field.
The decision of the British to leave the European Union is beginning to be beaten by the big banks operating in London, writes the Financial Times. The possibility that the UK will no longer have access to the European single market requires large banks with strong investment banking divisions, most of their foreign banks, to move some of their operations to other EU Member States in order to continue to gain market access common EU.
One of the most important ingredients that contributed to the success of the City of London in attracting global bank seas such as Goldman Sachs, Deutsche Bank or Societe Generale after the liberalization in 1986 was the so-called passporting right, which allowed financial institutions to operate in a single location within the EU and then sell their products and services in all EU countries. In total, nearly 70,000 employees of London’s global banks depend on the freedom of movement of services within the EU, one of the four freedoms set out in the EU treaties.
The big banks have strongly supported the pro-European campaign during the campaign, Goldman Sachs donating $ 500,000 for the pro-EU campaign. 84% of CityUK members, the lobbying organization of London banks, responded to their support for maintaining the UK in the EU. JPMorgan warned during the campaign that it could move 4,000 UK jobs by a Brexit, a quarter of its UK labor force, and half of that in London, while HSBC threatened to move 1,000 positions in Paris, the same number spoken by Morgan Stanley during the campaign.
Another consequence of Brexit would be the decrease in the number of employees from the EU countries in the UK financial industry. Out of the 360,000 London City employees, 78% are British and 11% are from the EU, with more than half being French, Italian or Irish.
The most likely alternative for banks would be to move operations to Frankfurth, Dublin, or Paris. But few banks, except for HSBC, see Paris as a London-based financial centre, Frankfurt is a medium-sized city with only 700,000 inhabitants and is seen as a province for many bankers, while Dublin remains too small to be a strong financial centre, in spite of the English language, the low fees and the legal system identical to the English one. London is by far the favourite among the other cities due to the strong developed services such as legal, IT, or audit.
Damian Carolan, a lawyer at London’s Allen & Overy, told FT that banks need at least two to three months to prepare an application for an operating license and after they wait for about six months if they are an investment bank or firm brokerage and nine months if they are retail banks. However, Carolan warns that in periods of unstable periods the deadlines may be much longer.
“This happens in normal times. In these times, you will have regulators who will ask you a lot of questions, “the lawyer says.
Most likely, the first Europeans who crashed a glass of champagne after the announcement of the result were not extreme right-wing politicians like Marine Le Pen or Geert Wilders, but even the top bankers on the continent, eager to attract global banks in need of finding a a new headquarters that will allow them to operate freely within the EU. The ECB tried in recent years to force euro clearing services to be placed inside the monetary area, but the measure was lifted by the Court of Justice of the European Union. But this time Britain’s chance of winning will be much smaller.
François Villeroy de Galhau, the Governor of the Bank of France and a member of the ECB Board, said immediately after the publication of the results that as long as the UK is not part of the single market, it “will not be able to maintain its” European passport ” from London”. And the European Banking Authority is of the opinion that clearing services can not be in a jurisdiction outside of the single market. In London, there are currently four large clearing houses.
Even if the UK financial industry gets an agreement that gives it access to the European single market, the UK will no longer have any influence on the new regulations, and the opinion of France and Germany will count more and more. Jonathan Hill, European Financial Services resignation commissioner and the first official to pay after the referendum, told FT that “Irish, German, French, and Dutch voices will be heard,” not the “moderating voice of Britain.”
“The nature and size of the financial services industry in France and Germany is different from that in the UK. This makes the policy direction evolve so as to reflect those voices while the British voice will no longer be there to balance, “said Jonathan Hill.
Not only the big global banks will change their strategies following Brexit. The asset management industry, another important component of the city’s 8,000-billion-euro asset management, will become uncompetitive in front of other European locations, which could lead to the loss of many jobs.
Amin Rajan, director of Create Research’s consulting firm, believes that job losses will be lost in the asset management industry in favor of Ireland and Luxembourg. “In the next five years, the centre of gravity will move to Dublin and Luxembourg for retail funds and in Frankfurt and Paris for institutional ones. London’s dominance in the sector can no longer be taken into account, “Rajan told FT.
Neither the insurance industry will be protected from the effects of Brexit. London’s Lloyd’s Square may lose to Asian competitors, leading Tokyo and Singapore, as it will no longer be able to offer unlimited access to Europe. And the $ 5 billion Forex market, the world’s largest and concentrated in London, could suffer as a result of losing access to the European market as most euro transactions are made in London, but the ECB wants to move clearing houses in euro area countries.
Britain will lose thousands of jobs after the Brexit process comes into force. Most jobs will be moved to Frankfurt and Paris, after banks, insurers and other financial institutions in the UK are ready to transfer, in the first phase, about 10,000 jobs abroad. That if London loses access to the European single market after Brexit, reveals a poll published by Reuters.
Most jobs (5,470) will be moved to Frankfurt, the German financial center being followed, far from the capital of France, to the top of companies’ preferences.
Of the nearly 5,500 jobs that could be transferred to Frankfurt, up to 4,000 would be relocated by Deutsche Bank. Dublin and Amsterdam are two other possible destinations indicated by survey respondents, attended by 123 companies in the financial services sector (banks, insurers, asset managers, private equity companies).
The survey was conducted between August 21 and September 15, a few weeks after the Bank of England deadline for companies to expose their plans for the measures being considered in the perspective of a so-called Gross Brexit, which would involve loss rights to provide services across the EU. About half of the companies intend to move jobs or restructure their businesses due to the UK exit from the EU, estimated for March 2019.
One third of companies say they will not be affected by Brexit, and the rest either have not decided whether to transfer jobs or have refused to respond. The results of the survey suggest that the number of jobs in the financial and banking sector that will be affected, first of all, by a rough Brexit is lower than the figures previously advanced by analysts, so London may retain its status as the largest centre financial situation in Europe.
Estimates of jobs threatened by a rough Brexit range from 30,000 in the case of a scenario analyzed by the Bruegel Institute in Brussels and up to 232,000, a figure reported in January by the London Stock Exchange general manager.
Could Brexit give the EU the opportunity to become more dynamic, more effective in addressing the many political challenges and to be more successful in attracting the support of its citizens? On the one hand, even in the absence of other outcomes, the political climate is currently unfavorable to future integration. On the other hand, Brexit removes a strong opponent of integration.
For example, plans to step up EU defence cooperation and security (a clear public good at European level) have been kept pending by the Commission until after the Brexit referendum, for fear of encouraging negative feelings in the UK . But given that the opposition in the United Kingdom was the reason for the disappearance of previous efforts in this direction (most recently by the Franco-German-Polish “Weimar” triangle in 2011), and given the need to reorganize European defence into the atmosphere created by Donald Trump, by distancing the US from NATO, Brexit means that proposals to intensify permanent defence co-operation will be made by the High Representative of the Union for Foreign Affairs and Security Policies at meetings of defence ministers and foreign ministers.
Given that Brexit also removes the obstacles to future tax integration in the EU, countries that have sought greater fiscal integration and more transfers consider Brexit as an opportunity to exert greater influence. Since Europe cannot afford another ‘exit’, other potential candidates genuinely generate strong political pressure as the precedent set by the UK.
Portugal and Spain have already dropped sanctions for breaching the fiscal pact, largely due to the uncertainties generated by Brexit. Perhaps the most obvious vulnerable country is Italy, one of the three largest countries in the EU, alongside France and Germany, and eager to play a more prominent role in European intergovernmental relations (as former Prime Minister Renzi explained at the tripartite meeting of re-launch of Post-Brexit Europe on the symbolic island of Ventotene, where Altiero Spinelli co-authored the European federalist manifesto as a prisoner of fascism). However, the Italian government is deeply frustrated (until it threatens to veto the EU budget negotiations), perceiving blatantly ignoring its views on the review of immigration and taxation policies.
A more viable, equitable path should be found between the wider scepticism of deeper integration, on the one hand, and the global challenges – both economically and security – which make the near-inevitable subsequent integration on the other hand. The post-war European integration process was meant to lead to a more equal political club, where France and Germany could act on their relationship in a slow but more constructive manner than wars that did not succeeded for centuries to produce a clear conqueror and a unified continental European state, not least because of the British interference. Probably because of the enlargement and certainly of the euro crisis, the EU’s decision-making process and bureaucratic powers have taken a back seat against the priorities of national policies over the last decade.
Unfortunately, intergovernmental transactions can not be as prospective and exhaustive as the EU is expected to be the ideal one. These can be more flexible, just as a quick relationship is more flexible than a marriage with cumbersome decision-making processes and complicated divorce procedures. Flexibility has short-term benefits, but lack of commitment makes it difficult to coordinate the plans needed to achieve long-term goals. A promise of being together for good and for the worse can be credible if divorce is difficult, it favors solidarity and offers incentives to eliminate differences and invest in future projects. Negotiations on intergovernmental policies are useful when crises require immediate action. They have a stronger impact, in general, in a populist political environment that targets the immediate benefits of self-interest, without taking into account their secondary effects and subsequent consequences. Moreover, negotiations between country leaders unequal power unlikely to cause resentment to the EU in smaller countries: if EU action is perceived as the result of negotiations between French and German leaders, it can not be readily accepted by Italian or Dutch citizens .
In any integrated economy, it is necessary to find lasting and constructive compromises that bring together often conflicting opinions about how to manage the economy. Is effective State interventions sufficiently controlled and monitored to ensure that they are not a good ground for increasing corruption and inefficiency? How can the private sector be involved? Obviously, there are important public goods and gains that could be achieved.
A clear project is the integration of the refugee flow, a field in which there are precedents in certain moments of deep crisis such as Germany after 1945 or France after decolonization when millions of newcomers have generated prosperity and dynamism. Another genuine European project would be to build the infrastructure for connecting local and national energy systems that have
present incompatible pricing structures. In this area, clear progress is made in terms of integration: the greater the diversity of supply and the more market alternatives (including different forms of energy), the more energy saving becomes more resistant to unforeseen events, including attempts to blackmail energy consumers.
In some European countries, especially Germany and some Central European countries, Britain has been seen as an important ally in the struggle for imposing market principles, while in France and other countries it has been widely considered a blocker. National opinions on the consequences of Brexit largely reflect its possible effects on the more or less desirable implications for the EU. If Brexit directs the EU towards a more coherent and conductive configuration, it is a positive development in the eyes of those who, as is often the case in France, consider that the state should play a strong economic role and threaten by international competition. In countries where public opinion is no longer on the side of closer integration (perhaps with the exception of a common army) and believes that taxpayers have in fact been forced to pay insolvent debts incorrectly, as is the case in Germany, fear is that without the UK, the EU will become “too southern”: insufficiently market-oriented and, above all, non-austerity in terms of taxation. Both Donald Trump and the new British government make tax expansionist an essential part of their agenda.
For those who are afraid of a return to tax immorality / waste, their main concern is about the decision-making process in the EU and, in particular, the voting mechanism. In many respects, the European Council decides on a Qualified Majority Voting System, requiring a majority of both Member States and the EU population: 55% of Member States representing at least 65% of the EU population must approve a measure (or, on the contrary, a blocking minority in the European Council requires states representing 35% of the population). With the presence of the United Kingdom and as long as the British government was firmly in the hands of the liberals, Germany was sure to block efforts not only to introduce anti-market policies but also, in particular, to provide the EU with a fiscal and banking framework which allowed public money to cross national borders. Without the 65 million people in the UK, the EU balance is changing. Some former communist states in Eastern Europe (Poland, and especially Latvia, Lithuania and Estonia) are strongly supportive of market liberalization, but as net beneficiaries of European structural funds can support the expansion and centralization of supranational economic policies. Germany and its neighbors Austria, Belgium, Luxembourg and the Netherlands plus Denmark, Finland and Sweden have a population of 141 million or 31.7% of the population of the other 27 EU Member States. This figure is inferior to the blocking vote of 35%.
There is no expression of more political allergies in Germany than the “transfer union” expressing dominant views against high levels of debt and an expansive monetary policy In France or Italy, the opposite is true: popular opinion tends to maintain public spending, in the view of an economic policy panacea. Such simplistic points of view, rooted in narrow and selfish perspectives, are in the way of constructive compromises which, both within the EU and within the nations, should lead to a broader and longer-term approach to economic and fiscal policy and recognize the wider and deeper social and economic benefits if they stay together.
Similarly, attempts to set up an adequate financial infrastructure, particularly in the form of a proper banking union, are also hampered by limited political prospects and interactions. In an integrated monetary and financial market, banks are authorized to operate anywhere, regardless of their nationality. Surveillance and decision should therefore be carried out at market level. In the eurozone, on the contrary, governments oppose take-over of international banks and mergers and are in charge of maintaining the viability of their country’s banking infrastructure. Insurance premiums should be matched for all deposits in the integrated money market and deposit insurance funds should be a reserve crunch facility instead of being used / operated to cover weak banks. Eurozone banks also do not have a risk-free asset, such as the federal debt of the US, with the unfortunate consequence of banks’ and government’s financial solvency spirals.
In the past, EU crises have often been used as an opportunity to advance and resolve such inconsistencies. More recently, by contrast, financial problems tended to induce repatriation of assets and liabilities and the renationalisation of banking systems. Progress towards resolving this problem is particularly hampered by Germany’s resistance to supranational oversight of the entire banking sector and the suspicion that any insurance system would involve resource transfers.
This attitude is easy to understand in light of the symmetrical tendency of other countries to try to attract common funds, but the resulting policy-making process is not obviously bold enough to keep the Union on the safe side of the abyss.
This is a 500 word reflection on your learning at GSM – NOT just the Project. Avoid trite comments like – ‘I wished I’d planned my time better’. Try to be insightful. It would be useful to bring in a little literature here – Argyris and Kolb for example.
Total number of words: 8635
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