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Paula Martín Camargo
Officials in Brussels were appalled to see the deal they have been toiling on for two years crushed by MPs in the heaviest defeat for a government in UK parliamentary history, only to be brought back to life by a slim margin after PM Theresa May caved in to Brexit hardliners’ demand that she goes back to Brussels in search of changes to the Irish backstop – the most loathed part of the deal. May was condemned in Brussels as untrustworthy and, what’s worse, willing to put her party unity above her country’s interest.
The PM made her way back to Brussels with nothing to offer in return except a bleak threat of a crude divorce in just over a month - an ‘atomic bomb’ Brexit “everybody dreads”, as the Maltese Finance Minister recognised.
The EU didn’t play ball. Top EU Brexit broker Michel Barnier said firmly that the backstop was needed “as it is”, while Donald Tusk said the core parts of the agreement were “not open for renegotiation”. The European council president Donald Tusk’s remarks that there should be a “special place in hell” for those who promoted Brexit without a concrete plan drew Brexiteer’s outrage, but for the first time he sounded reconciled to the fact the divorce would happen. He recognized that there’s “no effective leadership for Remain.” Barnier praised Labour’s leader Jeremy Corbyn’s letter offering May Labour’s support for her Brexit deal if she made five binding commitments, including joining a customs union – the PM declined the offer but asked for a meeting soon with the opposition leader, in what has been seen as aimed at quelling another rebellion within Tory ranks.
A sci-fi solution to the Irish border conundrum remains an impossible task on which the EU will not budge, but officials are considering offering May a plan on technological fixes to their proposal in order to avert a cliff-edge Brexit that might be blamed on the Irish issue – something’s got to give!, Barnier said. Whatever the insurance solution against a hard border on Irish soil, MEPs warned they would veto a Brexit deal without a backstop. A world leading expert on customs reminded that checks on both sides of the Irish border would be ‘mandatory under a no-deal Brexit’, which could spur an Irish unity poll, several cabinet ministers told the BBC. The push could jeopardize UK trade talks with the US, officials at Washington warned.
Theresa May’s demand to reopen the backstop issue was rebuffed but Commission President Juncker pledged further talks on the deal. Lawmakers are to vote other amendments on Thursday instead of the planned vote on further concessions to Brexit hardliners on a backstop to Ireland’s border solution – which May will most likely fail to secure. This might be the last chance for Parliament to avert a no-deal Brexit, Brendan Donnelly writes. But there may be a cross-party motion – backed by EU Parliament Brexit chief, Guy Verhofstadt - that could make Theresa May win Parliament’s approval for her controversial Brexit deal in return for guaranteeing another referendum with a binary choice: to confirm the decision or stay in the EU.
Business and public support a second referendum: More than 170 business leaders joined the campaign for People’s Vote, which would be won by Remain, with support for staying in EU at 56%, the highest level since the referendum.
Only a Government of National Unity (GNU) can solve the situation at this point, Graham Bishop said. A GNU must ask EU27 for a timetable extension to work thoroughly through the options. Then Parliament decides or puts it back to the people. The Queen called for "coming together to seek out the common ground".
Officials point out that, if no final plan is put to the Parliament by February 27th – something Labour is seeking to force, - the vote could drag on until late March, with just days to go until the exit date, forcing MPs to put a stamp on whatever deal emerges to avert the hard-crash abyss on March 29th , and making Brussels offer a technical delay of Brexit to allow the UK Parliament the necessary time to pass legislation.
European policymakers are split on the length of any Article 50 extension: they concede that less than a year will be too little to prevent a no-deal Brexit but reckon that May won’t have the courage to ask for such a lengthy postponement. A majority of voters would endorse a delay, a poll for The Independent found. But can the UK extend the Brexit deadline, Agata Gostyńska-Jakubowska at CER wonders, without being forced to hold European Parliament elections? Yes, lawyers advised the EP assembly. Cabinet members like Chancellor of the Exchequer Philip Hammond and Foreign Minister Jeremy Hunt hinted that a delay is possible if a new deal is reached.Germany and France have signalled their willingness to delay Brexit.
Just in case things go wrong – or in order to pile pressure on policymakers both in the EU and at home – a secret Cabinet members group has stepped up plans to kick-start the British economy in the event of a no-deal Brexit.
But few outside Britain want a no-deal Brexit: German Chancellor Angela Merkel and Japanese Prime Minister Shinzo Abe joined efforts to head off a no-deal Brexit that could rattle their economies. The ensuing chaos would threaten 100,000 German jobs, Welt am Sonntag reported. The Japanese are waiting for the final deal to continue informal talks on a future trade deal between the UK and Japan, which raises the odds of reverting to WTO tariffs unless the UK ratifies a Brexit deal.
Prospects for the UK economy hasn’t been this sombre since the global financial crisis, the Bank of England warned. British economy is on course for its worst year in over a decade, and official Office for National Statistics figures showed all three drivers of growth in the British economy – services, production and construction – tumbled into recession territory during December. The latest analysis from YouGov and the Centre for Economics and Business Research painted a bleak scenario, with consumer confidence at a five-year low.
Uncertainty is taking its toll across all sectors of British industry, and the decision to leave the EU has already cost dearly, whatever Brexit looks like: the UK economy is 2.3 per cent smaller than it would be if Britain had voted to remain in the European Union, think tank CER warned. UK firms are investing millions abroad instead of doing in in British territory, a study by the Centre for Economic Performance show, which finds no evidence of a ‘Global Britain’ effect.
A gloomy scenario that may turn into doomsday if no-deal Brexit finally happens: the British Chambers of Commerce warned that thousands of UK firms plan a mass exodus if the UK crashes out of the EU, while the CBI issued an ‘emergency’ call and analysed economic fallout, the loss of jobs and lowering living standards in every region and nation across the UK.
The cost of a no-deal is starting to be seen as irreversible for one of the UK’s biggest contributors, The City, and the ripple effects would resonate across Europe if financial industry doesn’t prepare for the impact, said German Finance Minister Olaf Scholz. EU regulators speeded up new rules to prevent the chaos taking place: ESMA agreed no-deal Brexit MoUs with the Bank of England for recognition of UK CCPs and the UK CSD as well as with the UK’s Financial Conduct Authority. The EU financial watchdog clarified the reporting and handling of derivatives data in case of no-deal Brexit and set out use of UK data in ESMA databases under a no-deal Brexit , which was commented on by ICMA in a briefing note. The FCA outlined how it would use the temporary transitional power.
While the UK Parliament bickers over the withdrawal from the EU agreement, money is flooding out of London: Five of the largest banks looking to serve continental European customers intend to move 750 billion euros of balance-sheet assets to Frankfurt, according to Bloomberg. Swiss group UBS was clear to move some of its UK business- involving assets valued at more than 32 billion euros - to Germany. The bank will keep equity trading in London post-Brexit. Citigroup CEO Michael Corbat confirmed that the bank will shift a large chunk of its non-UK European assets to the continent in the event of UK-based finance firms losing their passport to sell services into the European Union.
The shift of capital out of The City is the most concerning effect of Brexit uncertainty, but a drop in demand for services in the banking industry for the first time in five years is spreading pessimism, and the drip-drip of jobs to the continent keeps on, with Bank of America starting to move400 staff to Paris this month.
Political
France’s Emmanuel Macron and Germany’s Angela Merkel signed the Treaty of Aachen to increase Franco-German cooperation, an important step toward firming up the Franco-German partnership at the heart of the European project. But the pact excludes all other EU member states, so it risks deepening Europe's divisions even further, former German Minister of Foreign Affairs Sigmar Gabriel wrote. The two countries will emerge as the most powerful in post-Brexit EU, but the Visegrád bloc and the newly assertive Hanseatic League will challenge their power, experts at LSE predicted.
Commentators and officials believe that Brexit has made the EU stronger through unity among members to fend off the risks arising from a fragmentation, and it has made several European populist parties to backtrack on plans to leave the EU. Far-right groups such as the Swedish Democrats now intend to control the EU and adapt it to their demands from the inside, although the German Alternative für Deutschland (AfD) pledged to campaign for the country’s exit from the European Union if its demand for reforms within the bloc are not met.
But the UK withdrawal from the EU has also propelled nationalists from Italy to Hungary seeking to capitalise people’s dissatisfaction and form a united Eurosceptic front in the next European Parliament election against what they call the cosy liberal elite. The far right in France and Germany are moving toward an alliance of their own, whereas Italy’s far-right interior minister, Matteo Salvini, has said that Italy and Poland could trigger a “European spring” as he strives to forge far-right alliances. The electoral success of this radical parties normalises public expressions of support for them, research at LSE warned, which could translate on more votes in next elections. Concerning reports pour in from Norway, where its membership to the EEA has recently come under legal attack from EU sceptics and labour unions.
The far-left has been galvanised as well by the Brexit effect, with a group of France’s ‘yellow vests’ announcing they will run for European elections, while Italy’s Five Star Movement unveils plan to form EU Parliament group.
Economic
This grim political picture mirrors economic prospects for the eurozone: the ECB warned the eurozone is at risk of further slowdown of long-lasting effectsbecause of global trade tensions, Brexit and financial market volatility.
Finance ministers discussed the European system of financial supervision at January’s Economic and Financial Affairs Council and proposed to prioritise the provisions relating to the strengthening of the supervision of anti-money laundering (AML) and terrorist financing activities. In February’s ECOFIN, the Council confirmed its general approach on proposals to review the functioning of the current European system of financial supervision. At the Eurogroup meeting, ministers discussed the international role of the euro.
The euro’s 20th anniversary was the occasion to take stock of the success of the common currency so far. The ECB PresidentMario Draghi argued before the ECOFIN hearing that, building on what the EU has already achieved, its duty today is to continue to make progress in ensuring that all of the euro's benefits are realised in full. François Villeroy de Galhau, Governor of the Bank of France, said that the three principles on which Europeans have built success of the euro - price stability, independence and general European interest, - must guide us in addressing Europe's challenges in the face of 2019's uncertainties.
EU trade officials had reasons to celebrate: the EU-Japan trade agreement entered into force on 1 February 2019, while the EU-Singapore free trade deal got the green light in Trade Committee. On the downside, the goal of a transatlantic trade deal with the US will now be even harder to achieve than five years ago after the Tump administration newly released objectives, a PIIE analysis suggested. The new German industrial strategy, more aligned with France’s defence of its national champions, seeks to counter economic threats from China and the US in what has been seen as a signal of the EU’s swing towards protectionism.
Banking
As the potential banking turbulence of Brexit approaches, the Supervisory Board of the SSM is shrinking rapidly: SSM vice president Sabine Lautenschlaeger’s term ended on Monday leaving that post vacant, while Ignazio Angeloni will leave next month and there are no plans to fill his position – or another two empty seats at the board since 2017 – yet. The hiatus points to governance flaws in the ECB.
Other replacements are taking place at the heart of the ECB: The Eurogroup and the European Council endorsed Philip Lane, governor of the Central Bank of Ireland, as a candidate to replace ECB’s Executive Board member Peter Praet, whose term ends on 31 May. The Council will adopt its final decision at its meeting of 22-23 March after consulting the ECB and the Parliament.
The President of the Deutsche Bundesbank and Chairman of the Board of Directors of the Bank for International Settlements Jens Weidmann threw his weight behind an effective elimination of non-performing loans burdening European banks' balance sheets as well as severing the sovereign bonds-bank nexus through ending government bonds’ preferential treatment over loans to the private sector and households in order to pave the way for a single deposit guarantee scheme.
It is also time for taking stock of the performance of EU indicators, regulation and actors. The EBA released its annual assessment of the consistency of internal model outcomes, which covers credit risk for high and low default portfolios (LDPs and HDPs), as well as market risk. The results confirm previous findings, with the majority of risk-weights (RWs) variability explained by fundamentals.
The ECB Banking Supervision launched a sensitivity analysis of liquidity risk as its 2019 stress test and published supervisory banking statistics for the third quarter of 2018. The central bank was rebuked by the European Court of Auditors, that claimed that the ECB’s current position regarding access to documents and information prevents the ECA from fully scrutinising banking supervision in the EU.
The Basel Committee completed a review of its 2008 Principles for sound liquidity risk management and supervision and found that the Sound Principles remain fit for purpose and advised banks and supervisors to remain vigilant of liquidity risks in financial markets. The BCBS oversight body endorsed a set of revisions to the market risk framework and the Committee's strategic priorities and work programme for 2019. ESMA published its 2019 Risk Assessment Work Programme.
The European Union’s antitrust authority found and charged eight banks for operating a cartel while trading Eurozone government bonds between 2007 and 2012. Brussels accused them of taking part in a “collusive scheme” that focused on distorting competition when acquiring and trading such bonds.
The ECB working group on euro risk-free rates issued guiding principles for fall-back provisions in new contracts for euro-denominated cash products, an overview of the legal frameworks and market practices applicable to cash products, such as mortgages, loans and bonds, that reference EURIBOR and EONIA, with a specific focus on fall-back clauses.
Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA, assessed the final steps in transition away from the scandal-hit London Inter-bank Offered Rate (LIBOR) to new EU-approved standards such as the Sterling Overnight Index Average (SONIA). Schooling Latter said that, on a monthly basis, cleared notional in SONIA swaps is now higher than that for sterling LIBOR and urged market actors to replace or amend contracts that reference LIBOR before fall-back provisions are triggered.
The European Central Bank published the first statistics on secured euro money market, based on data from the 50 largest euro area banks, and provided an overview of supply and demand factors influencing the availability of euro-denominated debt instruments that qualify as high-quality liquid assets (HQLA) in the euro area, which found that there is a large supply of HQLA. The ECB will launch a survey of market participants’ expectations of the future evolution of key policy parameters in April 2019.
The European Commission started an evaluation of the consumer credit directive, whereas the EBF welcomed the TEG Report on climate-related disclosures as a key step in the much-needed transition to a low-carbon economy.
Capital Markets Union
EU institutions continued work towards a full Capital Markets Union, with a deal on updated rules for financial derivative products and clearing. ISDA, GFMA and IIF responded jointly to the Basel Committee’s proposed Leverage ratio treatment of client cleared derivatives.
The BIS’Committee on the Global Financial System issued a report that outlines ways to boost domestic capital markets, while Bruegel published a report commissioned by the Commission’s DG for Financial Stability, Financial Services and Capital Markets Union that aims to analyse capital movements in the European Union in a global context, and an assessment of equity finance and capital market integration in Europe.
The FSB published its Global Monitoring Report on Non-Bank Financial Intermediation in 2018, and ESMA set out its 2019 priorities for supervisory convergence.
Despite the initial reluctance to MiFID II ‘unbundling’ requirements and alarming warnings on its sweeping effects, it looks that the new set of financial rules are working, General Manager of ECMI Karel Lannoo wrote one year on from MiFID II set in motion. Not only the hysteria over analyst research appears misplaced, but the MiFID II package is set to go global as a US group has moved to absorb research cost.
Asset management
The European Commission released a report on the impact of the Alternative Investment Fund Managers Directive (AIFMD) on the industry. ESMA released a report onUCITS Alternative Investment Funds sold to retail investors (retail AIFs) and Structured Retail Products (SRPs) which finds that investment product performance is highly impacted by charges.
The ESAs published their final recommendations following a consultation on targeted amendments to the Delegated Regulation covering the rules for the Key Information Document for PRIIPs. IORP II, the European Union’s sweeping reform of pension fund legislation, came into force on 13 January. Investment & Pensions Europe assessed how the EU directive has reshaped the pensions industry.
Insurance
EIOPApublished its updated Risk Dashboard based on the third quarter 2018 data, which shows that the risk exposure of the European Union insurance sector remains stable overall. The European Insurance and Occupational Pensions Authority published its updated work programme for 2019.
Insurance Europe warned that the International Association of Insurance Supervisors’ proposal for a new “holistic framework” for identifying and managing systemic risk in the insurance sector currently lacks sufficient clarity. The European insurers association’s deputy director general Olav Jones said that the result of the ECON vote on ESAs review is largely positive, but concerns remain about the proposed governance changes.
Corporate governance
The FRC presented a strengthened Stewardship Code for consultation, while the FCA proposed new measures to encourage effective stewardship.
The European Corporate Governance Institute explored the possibility of a universal model for effective corporate governance and examined the distinctive features of “Platform” Governance and its implications for regulation. The European Council adopted its position on new rules to better protect whistle blowers.
The efforts to fix the market in auditing rumble on, The Economist reported. EU regulators decided that, from 2020, companies will have to switch auditor at least once every 20 years, while the UK’s FRC sent a letter to audit firms warning them against “rotation in form but not in substance,” in a bid to make audits less cosy across Europe. Recent scandals in Britain have testedthe faith of stakeholders in the corporate system, and the “Big Four” accounting firms are taking note and implementing new rules to revert the reputational damage.
The Commission published its first report on climate-related disclosures. The IOSCO followed suit with a statement setting out the importance of disclosure of ESG matters by issuers.
Anti-Money Laundering
The ESAs announced a multilateral agreement on the exchange of information between the ECB and competent authorities in anti-money laundering and combating the financing of terrorism.