AFTER the initial drama of the result of Britain’s EU referendum, an
uneasy calm has settled over the City of London. Markets have drifted
even as an existential question hangs in the air. Might London’s
financial firms end up drifting to a new home on the continent too?
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| Protestors hold banners in Parliament Square during a 'March for Europe' demonstration against Britain's decision to leave the European Union, central London. File Picture: REUTERS/NEIL HALL |
The
risk arises from passporting, a regulatory provision that allows
financial firms licensed in one EU state to provide services across the
bloc. Lacking a passport after Brexit, City firms would need
country-by-country approval for each service they sell on the continent,
substantially raising costs.
Alternatively, they could relocate and
operate with a continental licence but this, too, would be costly.
Either way, firms in Europe can ill afford the shock of higher costs and
reduced access to London’s capital markets.
This outcome could be avoided by granting the UK full access to the
EU single market, while at the same time placing restrictions on
movement of labour. But labour mobility is one of the four freedoms of
the EU, fundamental to the functioning of the single market. If the UK
can cherry-pick its freedoms, what is to stop Eurosceptics across Europe
demanding the same?
Whichever way that question is answered,
London need not give up its position as Europe’s financial centre, which
would be to the detriment of both parties. Rather, and as contradictory
as it sounds, the UK should consider joining the EU’s banking union
(membership of which is open to countries that are not part of the
eurozone), even as it withdraws from the bloc.
UK membership of
the banking union could allow passporting to continue while giving
ultimate regulatory power to the European Banking Authority and the
Single Supervisory Mechanism. This would answer Europe’s substantive
policy concern about London: that if it is to prevent or manage crises, a
core part of its financial sector cannot be located beyond the EU’s
jurisdictional reach. For Britain, there is further assurance of
oversight and voice given that banking regulations are increasingly made
at forums that are global not European. Were it to join the banking
union, the UK would participate in the European Banking Authority and
the Single Supervisory Mechanism. The UK Prudential Regulation Authority
would guide day-to-day oversight of London businesses.
At the
same time, the UK could allow free movement of labour in financial
services, even if there was a political imperative in Britain to control
labour movement more broadly. With a limited exemption from such
controls, financial firms would be free to hire EU nationals, while EU
countries could be confident that their fate was not left entirely to
foreign nationals.
Whether the two sides can come to an
understanding is uncertain. The UK will worry that the EU’s focus may be
more on preserving the euro than on financial stability per se.
Europeans will want to know how the two sides’ differing approaches to
the separation of investment and retail banking can be reconciled. Given
the stakes, a rapprochement on such issues is not out of the question,
especially with reasonable transition periods to work out the
complexities.
While there will be a temptation on the continent to
shift the EU’s financial centre of gravity, this is a perilous option. A
London-am-Main or sur-Seine would take at least a decade to build, time
Europe does not have.
The last thing the EU needs is a fragmented
capital market to match its fragmented banking system. A co-operative
solution with London, based on a banking union, seems better for all
sides than leaving the outcome to the complex bargaining that will
accompany the Brexit negotiations.
• Moghadam is vice-chairman for sovereigns and official institutions at Morgan Stanley.© Financial Times 2016
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