Among participants in the global financial market, Brexit is commonly painted as an almost Apocalypse-like scenario. The threat of a British exit from the European Union arguably involves a significant disruption to financial integration in Europe, will threaten the pre-eminence of London as a global financial centre, and will impose significant costs on all market participants.
In a recent paper, I take a different position on the significance of Brexit for the European financial market. I argue that, in reality, the impact of Brexit for financial services will be minuscule, if not irrelevant. My optimism is grounded, first, in the economic stakes for both sides, the UK and the EU27, in retaining the benefits of the European Single Market for financial services. Given the joint economic interests of both sides, a likely outcome of the Brexit negotiations will be a solution that formally satisfies the 2016 referendum result, but in substance keeps Britain closely involved in the EU financial market.
In its main part, the paper borrows from past examples in EU financial market integration that saw ingenious creativity at work in facilitating a desired outcome within the existing convoluted legal framework. This became particularly apparent during the 2008/09 Global Financial Crisis and the ensuing 2010-12 Sovereign Debt Crisis. One of the central tenets of policy-makers, regulators and supervisors has always been to put economic necessities over formal legal problems. As put by The Economist, 'Given a choice between financial stability and the rule book, ditch the rule book.'
The genesis of the EU financial market framework is full of such examples, particularly during the 2007-09 global financial crisis. Among the many examples is the famous conflict between EU state aid rules and bank bail-outs. The massive scale of taxpayer-financed rescue operations for domestic banks carried out by many EU Member States ran directly against the prohibition to support local firms because of market distortion risks. However, faced with an unprecedented risk of a global meltdown, the EU institutions had no other choice than to rubber-stamp all those bail-outs, arguably bending state aid rules to almost beyond recognition. Another example is the controversial line of activities pursued by the ECB, spanning Long-Term Refinancing Operations for banks (LTRO) since 2008, over the controversial ‘Outright Monetary Transactions’ (OMT) in 2012, to today’s Quantitative Easing.
The broader point is thus that legal principles are easily set aside when economic exigencies so require. This experience leads us to predict a similar approach being used for accommodating Brexit. My paper therefore predicts that a specific, tailor-made agreement will be concluded between the UK and the EU 27. Formally, this will satisfy the requirement of leaving the EU. In substance, however, the outcome may either embrace full single market membership or focus on equivalence of the UK regulatory regime, securing a third-country passport for UK financial services providers. A transition regime is considered as paramount to facilitate a smooth transition.
Wolf-Georg Ringe is a Professor of International Commercial Law at Copenhagen Business School and a Visiting Professor at the University of Oxford, Faculty of Law.