Down the eurozone rabbit hole: Questions for the UK

Looking at EU summits is a bit like looking through the looking glass but with concerns over a banking union, the question has to be asked - is Dave willing to leave the EU?

Many questions for the UK down there
Simon Miller
On 19 October 2012 13:01

“But I don’t want to go among mad people," Alice remarked.

"Oh, you can’t help that," said the Cat: "we’re all mad here. I’m mad. You’re mad."

"How do you know I’m mad?" said Alice.

"You must be," said the Cat, “or you wouldn’t have come here.”

Another EU summit and down the rabbit hole we go.

This one was meant to solve the vexed problem of banking union in the eurozone countries as the Mad Hatters yet again ran down yesterday’s path in a bid to solve today’s problems. European leaders are frantically trying to resolve the weaknesses of their banking system that hit the eurozone five years ago.

The problems that face the eurozone are not ones that will be resolved by spreading the risk capital around banks, placating German constitutional demands and saving France. The problems are those that will exist long after a banking union is put in place – the inequity between Southern and Northern states and the problem of disparate economies under one currency.

Now, if there is to be a full political union, then fair enough, banking union is a necessity but as always national politics will play a hand in what will eventually arrive, possibly next year.

Already we have seen aspiration taking over from concrete proposals. Inevitably, a fudge has occurred as politicians twist and turn in the light of their own domestic problems leaving any concrete proposals until late 2013.

For France, it is simple: Spain needs a bailout and our neighbour across the Channel is desperate to protect its banks from the serious fallout that would come its way if Iberia went down the pan.

For Germany it would be nice if difficulties such as persuading the German pubic that their taxes and wealth would be better served in the pursuit of union rather than their own households could be kicked down the road until its elections are done.

As a result, the traditional powers of the EU are having a bit of a domestic where the Germans decided to throw a spanner in the works by asking for a supervisor for national budgets, instantly throwing the whole concept of democratic accountability out of the window. For once I agree with the French over that one.

In addition, unlike France, Germany wants a limited, not full banking union, with only systemically important banks under supervision rather than smaller banks. This has nothing to do with domestic politics where the local Landesbanks are dominant in German life, nor would it be a reluctance to allow its banks’ books to be open to full scrutiny over their true financial health at all, would it?

Also inevitable is the position of the UK in all of this. Although I doubt we are sleeping like a dormouse in talks, the position of the UK is a curious one and getting curiouser and curiouser by the day.

Dave has said that he wants full banking union in the eurozone but how far is he really prepared to go to protect the UK? There has been great chatter about the idea that Frankfurt would require firms to be supervised by eurozone authorities in order to do business in the eurozone.

Well, I have absolutely no problem with that.

“What?” I hear you say. “No problem? But this is a power grab by Europe.”

Not exactly. UK banks are used to dealing with differing regulators in different countries and on a macro point of view, with international standards such as Basel III coming online, we will see a broad consensus on regulation worldwide so it is a bit of a straw argument for me.

No, my concern is what regulation will be enacted.

Already the UK government is in two legal disputes with the EU over the derivatives protocol which is against the single market act and capital movement. This is the key concern. The very principles with which we are meant to be in the European Union in the first place are already being breached and this is before a new eurozone regulator or a weighted voting bloc is put in place.

This is what we should be wary of. Not that banks will be up against yet another regulator but what rules will be put in place. And this is why Dave’s position is so confusing.

He wants a full banking union but will resist any attack on the single market – but as we see in some regulations bought in by Europe, what may be good for the continent may not be good for the UK.

And it is the UK that needs to be protected but how will Dave do this? How exactly can we protect an industry that sees some 1,400 foreign-owned firms operating in the UK with a third from the eurozone and around half of European investment banking activity conducted in the UK?

What will our reaction be? Do we leave? Do we set up a Swiss-style arrangement of bilateral agreements? Would we have to go to the World Trade Organisation to maintain access to the continental markets?

You see I am not particularly concerned about us going “offshore”. London is too large, too systemically important and too interconnected globally, let alone with the eurozone, for us to suffer too much. Indeed, everyone talks about how London is used to get into Europe but no one seems to mention that Europe uses London to get to the rest of the world.

London started off in the coffee houses where people wanted to trade freely with the rest of the world and there is no reason for us to stop now. Already, we are lining up to be the Western world’s renminbi market and are taking a lead in Sharia finance to gain the advantage with the frontier markets of the Middle East and North Africa.

If Europe wants to kick us out of the tea party then so be it. We will turn outwards as we always did before 1975.

If the eurozone wants to betray the principles of the single market, then the only people that will suffer will be themselves.

Simon Miller is a Contributing Editor to The Commentator

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