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[...]pretty unhealthy codependency that has developed between London and the continent, probably the one diagnosis on which Brexiters and EU officials can agree. Britain plays host to almost half of daily foreign exchange trading in euros and about 75% of the turnover of euro-denominated interest rate derivatives, a concentration that’s risky if it continues and maybe even riskier if it’s torpedoed overnight.
In a nod to Hegel, Olivier Guersent, the Commission’s financial services policy chief, calls this a “master-slave” dynamic that does neither party any favors. Speaking to me recently, he explained both sides have clear long-term objectives: London aims to diversify its trading relationships and boost business with Asia in particular, while Europe wants a more self-reliant and integrated capital market. Yet they can’t separate too quickly because of the danger of damaging their interlocked market structures. [...]
The compromise option of “equivalence,” which would offer limited cross-border access to the U.K. provided its financial rules were deemed sufficiently close to the EU’s, has failed to break the deadlock. The FT reported this week that ESMA chairman Steve Maijoor had warned of the risk of finance firms exploiting regulatory loopholes between the City and Europe after Brexit, even if the rules remained “close to one another.” And for British regulators, equivalence feels like an obvious downgrade, turning Britain into a “taker” of EU rules and Brussels into the final arbiter of its continued access. There’s not much evidence of compromise here.
But people should look a little further ahead before settling into entrenched positions. Instead of seeing equivalence as the regulatory end-game, it would be better looked upon as the starting point of a marathon.
The EU should be willing to grant equivalence as a way of preserving ties with London while it starts pushing for more regulatory powers of its own. That would also allow it time to pursue deeper capital markets integration between its member states and to build up its own financial sector. And the U.K. should be willing to accept equivalence as a way of preserving EU access in the early days post-Brexit, while it is still expanding the City’s business in other continents.
Whichever side achieves its broader ambitions first might then have more reason – and more power – to change the terms of engagement. If the City thrives outside of the EU, it could have leverage to change its rules, and then incentivize Brussels to change its own to match. Europe itself might become a “rule-taker” if it thought that was the most efficient way to preserve the financing of its economy, according to Guersent. [...]