02 February 2016

Brexit: The Tusk letter - Some initial thoughts

Moreover, all Europeans can thank Prime Minister Cameron for his success in pushing the EU to re-enforce its existing drive to become more competitive. That will be hugely to the benefit of the whole of the EU.  Every Member State will welcome the re-affirmation of the commitment to `subsidiarity’ – the process of only taking decisions at the EU level where demonstrably necessary.

On Brexit specific financial issues:

·        The UK recognises that the euro area will deepen its economic and financial integration and will not obstruct that.

·        The City may not be too pleased at the way in which it is to be `protected’: “single rulebook concerning prudential requirements for credit institutions …may need to be conceived in a more uniform manner” for the euro area but for non-banking union states “different sets of Union rules may have to be adopted in secondary law, thus contributing to financial stability.” What can this mean? This seems to give the UK the right to have tougher rules as it would be an extraordinary breach of the single market to have lower standards. So the UK could gold-plate say capital adequacy standards via higher capital requirements for UK banks – a long-held objective since arguments over CRDIV to ensure financial stability in the UK given its outsize banking sector.

·        The UK explicitly stated it was not asking for any veto and the proposal ensures the UK cannot be an effective veto on managing the banking union or euro area integration.

·        However, the key “[X]” members of the Council who can object to a QMV vote on legislative acts relating to the banking union is likely to be hard-fought - both as a number of votes and the specific acts to which it applies. Currently, the ability of Outs to prevent actions is limited to very specific actions by the European Banking Authority and it ceases if there are four or fewer OUTs. Given the expectation of enlargement of the euro area in say the next decade, will the INs agree to a smaller number and apply it to a far wider range of actions??? When does it become a de facto veto on banking union matters?

·        There is also a virtually-incomprehensible section on not changing the voting rules within the Single Resolution Mechanism. Given the scale of UK- domiciled activity in euro-denominated financial markets, this may be a key item for financial stability in an extreme crisis.

© Graham Bishop