15 March 2021

BDB Strengthening Europe’s sovereignty

The European Union faces the once-in-a-century task of asserting itself – as a community – politically, economically and socially in a world of global competition. Europe’s economy will remain dependent in this process on open and secure world markets to unfold its strength.

 

Summary: how to strengthen European sovereignty

1. Political sovereignty
2. A strong capital markets union
3. Role of the euro
4. Digital euro
5. Digital sovereignty
6. Sovereignty over European payments
7. Protecting the European economy

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Summary: how to strengthen European sovereignty

 But for Europe, too, competitiveness and strategic direction are interrelated. The EU financial market has a key role to play in ensuring Europe’s economic success, competitiveness and sovereignty. This applies especially to capital markets union, economic and monetary union – including the role of the euro – digital sovereignty and European payment systems. At the same time, political union must be moved forward in order to safeguard Europe. This includes a common foreign policy.

We welcome, in this context, the European Commission’s communication of 19 January 2021 (“fostering openness, strength and resilience”), which addresses this issue and underscores the strategic relevance of strong financial markets. In our view, however, the communication and the actions it proposes do not go far enough. The communication takes insufficient account of important prerequisites like political unity, material foundations and interrelationships such as foreign and security policy resources, and sovereignty over the digital transformation and payments. Below, we set out our position on the question of how European sovereignty can be strengthened.

1. Political sovereignty 

• The European Union – like any political community – needs sovereignty in order to ensure its security and prosperity and to safeguard its interests in a world of global competition. 
• So political sovereignty is neither a question of prestige nor an end in itself. It means global heft and a seat at the global table, not isolationism or disengagement. And this applies both to international negotiations and institutions and to bilateral relations. Political sovereignty therefore only makes sense if it offers solutions. 
• The EU will continue to base its prosperity on the deep global integration of its economy. As global economic relations are contested, it is becoming increasingly important for the EU to play an active and strategic role. It must do so, on the one hand, to establish and uphold multilateral rules and, on the other, to better protect against political or economic pressure from third parties (“weaponizing interdependence”, “economic coercion”).
• Transatlantic cooperation remains the most sensible anchor for the EU. Europe’s security remains dependent on US commitment, and this goes not only for securing transport routes and access to raw materials but for much else besides. What is more, the close integration of both sides’ economies and financial sectors continues to benefit Europeans, too, and should not be put at risk. Further fragmentation of markets is not in Europe’s interests.
• The EU cannot remain neutral or on the sidelines in the face of the growing rivalry between China and the US. Instead, as in past decades, it must position itself where possible in the framework of transatlantic cooperation.
• The EU has yet to realise its potential as a single actor in international institutions. This continues to apply to the UN, but also to supranational financial policy institutions such as the Basel Committee, the Financial Stability Board or the International Monetary Fund. 
• To strengthen its sovereignty and role in international relations, the EU – like any political community – needs to fulfil the material prerequisites to do so and have a coherent strategic orientation. This is only possible with realistic guidelines and staying power. “Actionism” will not prove helpful. 
• A key precondition for protecting the European and thus the German economy is that EU member states do not allow themselves to be divided and ruled. Unfortunately, it is still far too easy to disunite the EU – in the face, for example, of calls by third parties to boycott individual countries. The EU is a market with strong purchasing power and a productive investment location with almost 450 million citizens. When the EU speaks with a single voice on foreign trade policy, this carries weight and is not ignored by third parties.
• Crucial to the long-term success of an EU strategy is that it thinks beyond foreign trade policy and takes a holistic view of the various aspects of the economy and foreign policy as a whole. This requires a strong, integrated financial and capital market as well as a digital strategy that includes sovereign payments processing, cybersecurity, and platform, infrastructure and data sovereignty. The goal should be to avoid further asymmetries, i.e. unilateral dependence on third parties. Mutual dependencies, on the other hand, are a natural part of the global economic system.
• The financial sector is of strategic relevance to Europe’s sovereignty. A strong financial market is an essential – though in itself insufficient – prerequisite for Europe’s sovereignty. This means, conversely, that the financial market is by no means Europe’s only potential weak point and open door to outside influence. Classical defence capability and political unity remain prerequisites – asymmetries or dependencies in this area cannot be counterbalanced by economic strength alone.
• For Germany and the EU, it is as true today as it has been for many decades that rigorous multilateralism is in their own geostrategic interest. Multilateralism means stable partnerships, institutions and rules-based action, both within and outside the EU. It does not mean shifting ad hoc coalitions with those who are currently like-minded. 
• It continues to be the case that the EU economy – be it in the absence of other power resources in European politics – is dependent on a stable international legal framework. Its central principles include the rule of law, mutual market access (reciprocity), data protection, the protection of intellectual property, the liberalisation of currencies and the free movement of capital.

2. A strong capital markets union

• It remains crucially important for Europe to substantially expand its economic strength and be prepared for future challenges.
• This includes the development of a deep, efficient and integrated capital market (capital markets union, CMU) against the backdrop of a strong internal financial market in the EU (key action 1 of the Commission’s communication). The European financial market must be made more competitive, as well as more attractive and open to foreign investors, in particular. 
• The Association of German Banks therefore welcomes both the action plan on capital markets union of September 2020 and the reform and modernisation of European energy and commodity markets proposed in the communication of January 2021. We consider it especially important to target the promotion and development of euro indices and benchmarks as well as trading in euro-denominated financial instruments, including derivatives (key action 2). These measures, and the CMU project as a whole, should not focus on operators of trading venues alone but must take account of banks as service providers and intermediaries of issuers and investors – and thus as important actors in the capital market. Otherwise, the development potential needed to strengthen the European economy will be severely limited. Unlike trading venue operators, which bring together securities trades placed by investors without taking on any risk themselves, banks perform a wide range of valuable tasks: from issuing and bilateral and multilateral trading, to securities settlement, custody and servicing, often deploying their own capital and assuming risk in the process. Generally speaking, strong capital markets, such as the US and UK, have strong banks.
• We support the planned promotion and strengthening of European emissions trading. As in energy and commodities trading, the goal here should be to establish an efficient and internationally competitive European market (key action 5).
• Our association welcomes the announced establishment of a working group to discuss the desired reduction of euro-denominated interest rate derivative exposures to central counterparties in the United Kingdom (UK CCPs) and the transfer of some of these exposures to the EU. The German banks recognise the need for action given the temporary nature of the current equivalence decisions and are already addressing this issue and the associated challenges in depth. They are prepared to actively support work in this area. It will be important to carefully analyse the considerable challenges and economic implications and to find solutions that will ensure the international competitiveness of European banks and the European financial market. In particular, it is vital to avoid restricting EU access to international capital markets. With this in mind, our association recommends an incentives-based approach, combined with further standardisation of the European regulatory framework and targeted regulatory relief. This is the only way to ensure the necessary supply of liquidity (key action 8).
• A transparent, consistent and dependable EU equivalence regime will give the European single financial market strong support. It is in the interests of the European Union to provide EU market participants with a system to support their strategic planning and long-term decision-making processes and strengthen their global competitiveness.

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