The EU project is at an inflection point. Intra-EU alliances are altering in light of the UK’s departure, and the EU is grappling with a constellation of crises, including the continued fallout from the financial and eurozone crises, which has also spawned populist movements in some Member States. The EU’s financial markets remain segmented and there is limited appetite for completing the Banking Union. The second stage of Brexit negotiations also collided with the unfolding Covid-19 pandemic, a medical emergency that has placed economies around the world under tremendous strain. This crisis has consumed governments’ attention with respect to managing the spread of Covid-19. It has also reinforced the primacy of the nation-state in a time of crisis and produced new divisions within the EU with respect to forming a collective strategy for tackling its economic fallout. The combination of issues amounts to a ‘polycrisis’ for the EU, aspects of which raise existential questions about the future of the EU project.
My working paper, available here, focuses on one strand of the debates generated within this polycrisis: future UK/EU cooperation with respect to financial governance or the mechanisms which support financial market regulation and supervision. The paper discusses the importance of the financial services sector to the UK and the EU, reflects on the various financial governance crises facing the EU and explores how these may generate the space for innovation. In this regard the paper then examines potential institutional frameworks for future UK/EU financial governance cooperation.
On the one hand, any ambitious and innovative developments may appear unlikely in the short-term, especially given the various UK/EU political tensions that have arisen post-Brexit. Moreover, the short-term UK/EU vision regarding a future financial governance relationship refers expressly to establishing only ‘regulatory cooperation’ and the UK/EU Joint Declaration on Financial Services Regulatory Cooperation adopts a light-touch approach, providing that the parties will agree a non-binding memorandum of understanding to further such cooperation. Nevertheless the paper suggests that there is greater scope for more dynamic solutions over the longer term. In particular, the paper highlights the nature and significance of the EU/UK interdependence in the field of financial services. Given this, the paper shows that it should be in the mutual interest of the EU and the UK to develop a new financial governance relationship based on a high degree of cooperation between the two jurisdictions. Such a framework would enable the existing, deeply integrated cross-border flows in finance to continue and would assist in sustaining employment and growth throughout Europe.
In relation to the EU, the paper explores the various challenges facing the Union in the field of financial governance and reflects upon how these may influence a new institutional framework. In particular, the EU is struggling to complete a number of projects, including its euro-area Banking Union project. The future of its Capital Markets Union initiative also remains unclear. In addition, in light of the UK’s departure from the Union, intra-EU alliances have shifted, and the Covid-19 pandemic has introduced new disagreements between states as to how best to tackle its economic impact. Today’s EU project is also notable for the level of variety inherent in it: some projects are single market endeavours whilst others are eurozone-specific. Taking account of such variables, the paper shows that the crises the EU faces, and the level of differentiation in the set-up within and surrounding the EU, can be a crucible for experimentation.
In this regard, the paper considers three potential institutional options for future UK/EU financial governance coordination over the longer term based on the adoption of common standards (which includes regulatory cooperation and could extend to embrace supervisory cooperation if there is sufficient political will). It discusses the creation of a joint financial governance committee; the development of bilateral and mini-lateral alliances (that could offer the UK some market access rights with respect to particular Member States); and a functional UK/EU association regarding the pursuit of a common policy on future UK/EU cooperation.
In relation to a joint committee, the paper suggests that there are risks as to whether this could achieve concrete results; its success would depend on its status and objectives. With respect to bilateral and mini-lateral initiatives, the paper explores the UK/Member State relationships that are emerging and suggests that further productive transnational coalitions may develop over the longer term. Such arrangements could, for example, open up some aspects of Member State markets to the UK and could indirectly impact upon a future UK/EU relationship. Yet such strategies are not a panacea. They require much negotiation and, given that different states will wish to advance different national interests, they can only advance a limited range of initiatives. Accordingly, any such arrangements should be pursued in addition to formulating a new UK/EU association. In relation to this, an examination of existing EU/third country association arrangements illustrates that these have the capacity to be surprisingly versatile. Given this, the paper advocates harnessing the dexterous aspects evident within precedents in order to develop a functional financial governance arrangement for future cooperation. In the first instance, such a set-up could be utilised to accelerate a recalibrated Capital Markets Union initiative. This EU project, which aims to create a true single market for capital, has become all the more vital in light of the Covid-19 crisis. All economies (including the UK outside the EU) are facing much higher levels of debt and many businesses will require substantial new forms of equity funding going forward. In this regard, a mutually beneficial UK/EU arrangement that could facilitate firms’ easy access to finance would be a valuable project to further financial governance cooperation. It could also lead to closer UK/EU cooperation than currently appears likely.
Elizabeth Howell is an Assistant Professor of Law at the London School of Economics and Political Science.