The Euro is facing a crisis and nothing could be worse for the European Union. German Chancellor Angela Merkel once said that “the euro is the guarantee of a united Europe; if the Euro fails, Europe fails.” The Chancellor made these comments during the depths of the eurozone crisis in 2011.
Now we face a similar crisis, Italy is pushing the boundary of the eurozone, threatening to rip up the budgetary constraints that are mandatory for eurozone members. Now financial markets are beginning the once again feel the heat of the currency falling apart and behind the scenes, there are rumblings about what needs to happen next.
What does the UK think? Who cares, according to Brussels. The world’s largest pool of capital appears to be almost irrelevant to the ailing European Union.
Why should we be surprised though? The EU has always rejected the UK’s thoughts on the Eurozone. David Cameron, representing a fully-paying member state was often dismissed, even at the height of the crisis in 2011. In an EU heads of government meeting on the Greek debt crisis in October 2011, Mr cameron tried to speak up, when the French President Nicholas Sarkozy interrupted: “You have lost a good opportunity to shut up. We are sick of you criticising us and telling us what to do. You say you hate the euro and now you want to interfere in our meetings.”
Whilst of course it is undeniable that the British have always had a sense of pride that they didn’t adopt the euro and decided to remain with the pound sterling, the British have always had a mutual interest in the success of the common currency. If the British took no interest and the banking industry collapsed, the ramifications for Britain would have been catastrophic. Additionally, the UK was always being asked to contribute to the bill, member of the eurozone or not.
Sir Ivan Rogers, gave a lecture in Oxford in November last year, where he gave a definitive account of the fallout during the crisis meetings of 2011 saying that: “The UK constituted a very high percentage of wholesale market activity, with London being massively the biggest financial centre . . . The question of whether and how the UK could effectively defend its interests when it was not a member of what, to most others, had become the central economic project of the union . . . became equally existential for the UK.”
As Rogers went on to relate, the December 2011 decision on a so-called fiscal compact “was not notified to London. And it only really became clear during the night of the [heads of government] meeting that a deal had been stitched up to bypass the UK.”
Cameron then exercised the only power he had: the UK’s veto. At which point Germany and the others simply said: we’ll ignore you and do what we want by inter-government agreement, bypassing the treaties.
Europe has never wanted the UK involved in any key decisions when it comes to the euro but it has been more than happy to accept its hand full of money.
Now Theresa May’s Government is facing the same issues. Now negotiating our future relationship outside the EU, Mrs May had hoped that when it came to financial services, to strike a deal known as mutual recognition. That would have allowed the Bank of England to retain its autonomy on regulations governing financial activities in the UK involving EU customers. And we would additionally recognise EU regulations governing their banks. But Michel Barnier, the EU’s chief negotiator, has rejected this.
Once again the EU is ignoring the financial importance of the UK. But remarkably, the chancellor, Philip Hammond, seems prepared to accede to Barnier’s adamantine demand that Brussels become the rule-setter if there is to be a UK/EU services deal. It is remarkable not least because the UK’s financial sector dwarfs that of the European mainland.
The former EU financial services commissioner, Lord Hill told the House of Lords in January: “One of the reasons why I voted ‘remain’ was that I thought it would make no sense at all for a service-based economy such as ours to be bound by rules over which we had no influence. Now that we have voted to leave, that same logic holds — actually the logic is even stronger … For an economy that is as dependent as ours on services, how could we in all seriousness subcontract all rule-making to someone else?”
But if no deal is done and a financial wall goes up between London and the EU, there will be a steep rise in costs, the inevitable result of fragmentation and European banks’ inability to access the world’s biggest pool of capital. Sovereign debt trading is only marginally profitable as it is. Reuters, in a report entitled “How Brexit is set to hurt Europe’s financial systems”, spoke to “the chief executive of one of the largest [Citybased] underwriters of European sovereign debt”, who told the news agency that “the European Central Bank called him asking him not to abandon selling European debt because of Brexit. ‘They [EU countries] cannot be shut out from London’s capital markets,’ he said. ‘It’s suicide.’ ” In other words, Barnier is pursuing a path that would make the Italian state’s debt repayments soar still higher.
If that is Brussels’s plan to maintain the integrity of the eurozone, it really does need advice. Brussels must remember that they cannot ignore the importance of Britain and they cannot treat Britain like they did during the depths of the financial crisis. Britain is the most important financial market in the world and Brussels cannot inflate its own importance. Unless Brussels shows some flexibility on this issue they risk the economic stability of their own Member States.