Sunday, 4 October 2015

Little Europe is retreating from the world


Our friends British Influence​ are crowing about the EU's creation of a capital markets union. It aims to make create deeper and more integrated capital markets in the EU. Eurosceptics will invent many reasons to hate it just because it comes in EU packaging, but it's actually no bad thing in principle. The removal of technical barriers to investment can never be bad.

That said, as with most initiatives we see from the EU, it is in fact replication of a global effort as a means of assuming ownership of it. What it amounts to is the implementation of a number of policy reviews since 2007. Namely MiFID2. Various financial instruments will be subject to these "new" rules but again are largely Basel 3 and EMIR requirements - the global conventions for banking regulations.

The House of Lords report on the "post-crisis EU financial regulatory framework" – only published in February said it is likely that the UK would have implemented the vast bulk of the financial sector regulatory framework had it acted unilaterally, not least because it was closely engaged in the development of the international standards from which much EU legislation derives.

As with all such developments there is good and bad, and in some cases regulation that supersedes other regulation is actually deregulation in essence. The authors of much of these conventions are in fact the banks themselves and large consultancy firms like KPMG - with consultation all through the chain.

If anything it is the banks who are leading the way because they like regulation, they like standardisation and they like global networks without technical barriers. In many respects they are way ahead of downstream lawmakers like the EU in terms of creating a global single market in banking. But that's never good enough for the EU. The EU always attempts to claim such initiatives as their own. In any other sphere it would be considered plagiarism. It is born of this myopic little Europe mentality, where Europe breaks away from the global effort to focus on its own back yard, further complicating what is already fairly good regulation.

As if the wasn't bad enough, and at a cost to the City, the EU will naturally take many years to implement it, taking into account the foibles of all the EU member states when really London should be forging ahead without waiting on the EU. As it happens, we have far more of need to develop a single market for investment with Canada, Africa, the US and India. When I think of expanding the reach of our global investments, Bulgaria and Romania are not the first nations that leap to mind.

Consequently, by creating a technical barrier to trade with the rest of the world, it means is that the rest of the world will suffer "the Brussels effect" whereby any nation that trades with Europe will adopt the EU standard by default because compliance with the most stringent is usually the cheaper option in the long run and less hassle than running two concurrent regimes. But that's only for the big boys who can afford it. Smaller operations and start-ups will simply ignore Europe and seek investment opportunities with less developed states who use the global default standards. Rather than being free market, once again we see "little Europe" putting its head in the sand and protecting its own internal economy at the expense of doing business with the evolving global markets.

What is of more concern to us is that because the EU intends to reform as a two tier Europe, with the Eurozone states acting as a single financial entity, we will be a second rate influence inside the EU with no outright veto over measures that may harm the City. If that is the cost of being in the EU then we are better off opting out of the European capital markets union and joining the global single market instead - where the banks are driving down barriers years ahead of the Strasbourg talking shop. The subsequent boost to our economy would give us the economic clout to maintain access to the EU market on special terms by way of a mutual recognition agreement.

More than anything though, I don't trust the EU in any such undertaking. The EU's first priority is always the taking of more powers by means of the beneficial crisis doctrine - and its supranational ambitions always take priority over what is in the common good. In a system where we are structurally outvoted, and when the City has the most to lose. At best we'd be looking at a form of economic hibernation and at worst the hollowing out of our main global asset in the square mile - which could be used as a slush fund to prop up the EU's currency of perpetual crisis. And they say it's us Brexiteers who are gambling with Britain's future!

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