One of the most important parts of the UK/EU negotiation was the attempt by the UK to gain guarantees that the UK as part of the EU will not be drawn into Euro related regulation of the finance sector nor into the financial consequences of the Euro.
The UK began by asking for the Union to be described as a “multi currency Union”. The final text allowed instead “not all member states have the euro as their currency”. It also drew attention to the fact that all but two countries (UK/Denmark) do have to adopt the Euro in due course.
The UK sought a repetition of past assurances that the UK will not be responsible for any bail outs of Euro members. The text states “ Emergency and crisis measures designed to safeguard the financial stability of the Euro area will not entail budgetary responsibility for Member States whose currency is not the euro, or as the case may be, for those not participating in the banking union.” The EU is allowed to bill the administrative costs to the EU general budget, but other costs from any emergency will be reimbursed, implying that the UK may have to make an initial contribution,as it did with the Greek loan in the summer of 2015.
The UK sought to keep its own rule book and ability to supervise its own banks and financial institutions, given the drive to common regulation and control in the Euro area. This produced the following balanced text:
“The implementation of measures, including the supervision or resolution of financial institutions and markets, and macro-prudential responsibilities, ………(for non Euro countries)…is subject to the requirements of group and consolidated supervision and resolution, a matter for their own authorities and own budgetary responsibility, unless such member states wish to join common mechanisms…
This is without prejudice to the development of a single rule book and to Union mechanisms of macro-prudential oversight for the prevention and mitigation of systemic financial risks in the Union and to the existing powers of the Union…”
In practice the UK will come under an increasing volume of EU financial regulation, both as new Directives and regulations are passed, and as the ECJ and the European Central Bank augment their powers as need arises and individual cases dictate. There are no new mechanisms to prevent Euro area member states using their power to form new EU regulations and outvote the UK.
The UK also gave new ground to the Euro area by accepting the following limitations on its future actions:
“In order to fulfil the Treaties’ objective to establish an economic and monetary union whose currency is the euro, further deepening is needed……It is acknowledged that Member States not participating in the further deepening of the economic and monetary union will not create obstacles to but facilitate such further deepening….”
The intention to create a single currency area with full monetary, capital markets and banking union is clear, and the UK has agreed to not to impede it. As a result there will likely be an increasing number of issues over the common rule book and EU wide regulation of the finance sector. In recent years there have been several important disputes between the UK and the EU over these matters. The UK had to dig in to secure protection against possible loss on its share of the loan to Greece in 2015. The government withdrew its court case against EU rules limiting bonuses in the financial sector, on the grounds that the case was “unlikely to succeed”. The UK has been worried about the Alternative Investment Fund Managers Directive with its capacity to drive hedge funds away from the EU altogether, but unable to stop it. The UK was also unable to block the restrictions on short sales introduced by ESMA.
The UK has so far impeded the Financial Transaction Tax which some EU member states wish to impose. This could return to pose difficult issues over where and whether the tax could be charged on a trade were the continental countries to reach an agreement to press ahead without UK consent. Would London have to levy the charge on a German-French transaction handled through London? What if a UK person or corporate were one of the parties?
Living alongside the Euro area as it moves to complete its full banking and capital markets union will pose problems as the EU intends to use the legal authority of the whole Union, not just the Euro area, for many of the measures it thinks it needs. The Union as a whole has a defined legal personality and well established decision making institutions which are not matched by the Eurozone. Much of the Eurozone’s business has to be cleared through the EU. The general EU budget also could become an issue.Whilst the UK has the promise that this will not be used for emergencies and bail outs, the Euro itself may require larger regional programmes, administrative expenditure and other items where the general Union budget will be used.
This article was originally published on John Redwood’s Diary on 4 March 2016.