28 January 2016

Bruegel: One market, two monies - the European Union and the United Kingdom

Deepening integration in banking, capital and labour markets will likely require governance integration, which might involve only the subset of EU countries that use the euro. Safeguards are needed to protect the legitimate single market interests of the UK and other euro-outs.

The issue

Access to the single market is one of the core benefits of the United Kingdom’s membership of the European Union. A vote to leave the EU would trigger difficult negotiations on continued access to that market. However, the single market is not static. One of the drivers of change is the necessary reforms to strengthen the euro. Such reforms would not only affect the euro’s fiscal and political governance. They would also have an impact on the single market, in particular in the areas of banking, capital markets and labour markets. This is bound to affect the UK, whether it remains in the EU or not.

The policy change

[...] Irrespective of whether the UK stays in the EU or leaves, these questions must be tackled. In particular, after an exit from the EU, the UK would want to retain access to the single market. The exit negotiations would certainly focus on that access and the conditions attached. Changes to the single market and its governance – for instance to strengthen Economic and Monetary Union (EMU) – would affect all countries that are part of the single market, whether they belong to the EU or not. But they will affect EU and non-EU countries differently in terms of governance. For EU members, the governance mechanisms would be mostly based on the EU treaties, but the UK outside would have to rely on intergovernmental agreements.

Finally, no federation or confederation remains static in governance terms. The EU will be continuously subject to reforms and changes. This complicates the definition of the relationship between the euro area and the single market because the euro area’s eventual shape is far from being agreed. We consider likely future developments in euro-area governance and how their impact on non-euro area and non-EU countries can be managed. As a blueprint for future governance developments, we use the Five Presidents’ Report issued by European Commission president Juncker (2015), though we recognise that it leaves many important questions unanswered. [...]

Will euro-area reform change the nature of the single market?

[...] But the post-crisis debate went further and argued that a ‘genuine EMU’ needs, as well as monetary union, an economic union, a banking union, a fiscal union and ultimately probably a political union10. The Five Presidents’ Report makes concrete proposals on how to move forward, and the banking union has been already set in motion. These proposals have direct implications for the single market in terms of banking, capital markets and labour markets.

Banking

[...] A successful banking union should eventually lead to a more integrated euro-area banking market, with fewer national banks and greater cross-border banking. But such a development raises significant questions for the single market for banking, from both economic and governance angles. Will more-integrated euro-area banks fragment the EU banking market by deepening the separation from non-euro area banking systems? How will new euro-area institutions act? Will there be new EU regulatory initiatives with the primary aim to strengthen the euro-area banking market? The overall question that must be addressed is how far such initiatives would be detrimental to the single market for banking.

Capital markets

[...] Beyond over-arching political risks, regulatory harmonisation (such as corporate insolvency, taxation or financial product regulation) can increase cross-border financial flows. The question is then whether a subset of EU countries or even the euro area will advance without the UK and to what extent that would be an obstacle to the economic development of the UK and its financial system. Deeper euro-area capital markets do not per se undermine the role of financial centres outside the area. [...]

Labour markets

[...] One of the UK’s core demands is to end equal social security treatment. [...]

Introducing discrimination in the treatment of domestic citizens versus other EU nationals would limit EU labour mobility, with negative effects for resource allocation and EU growth prospects. It would also most likely require a revision of the EU treaty, which would have to be done in a way that left the equal treatment principle untouched for the euro area, where labour mobility is essential on efficiency grounds and as a shock absorption mechanism. [...]

How to manage frictions between deeper integration of monetary union and the single market?

[...] But it is not only the countries currently outside the euro that need safeguards to protect their legitimate single market interests. The majority also needs protection to ensure that their legitimate efforts to strengthen EMU, including where necessary by deepening the single market, will not be vetoed by the non-euro minority. This boils down to creating mechanisms to protect both the minority against the tyranny of the majority and the majority against the tyranny of the veto.

Agreement should be reached on this within the existing treaty framework. Giving the UK (and other non-euro members) a veto right would not be any more appropriate than the euro countries having the right to disregard the opinions of their non-euro counterparts. This mutual guarantee would have to apply to EU laws as well as the actions of existing institutions. [...]

Full policy brief

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