UK mugged by eurozone banking union?

Canary Wharf

Whether we like it or not (some don't) the City of London and financial services is important to the UK economy. Depending on what you include in that industry, it represents between 8% and 14% of national output or GDP - and banks and banking are (again for better or worse) the core of the City.

When the entire banking system went to the brink of collapse, and in the process hobbled our economy for years to come, we learned the hard way that proper regulation and supervision of our banks (which was so singularly absent for years) is of the greatest national importance.

Which is why there are mixed feeling in the government and among our regulators at this morning's agreement by eurozone leaders to centralise supervision of eurozone banks: during the course of next year, the European Central Bank will acquire responsibility and the tools for trying to prevent banks going bust and winding up those that get into irredeemable trouble.

In one sense, this will be seen as very good news for the UK - because it is an important step on the way to preventing a disorderly fracture of the currency union, which could muller our economy.

The reason this kind of so-called "banking union" matters is that in time (though we don't quite know when, but probably next year) it will be the trigger for transferring the financial burden of bailing out and strengthening Spain's chronically weak banks from the beleaguered and over-stretched Spanish state to all eurozone members, via the European Stability Mechanism or ESM (the currency union's new bailout fund).

In that sense, banking union is actually a precursor to the kind of fiscal burden-sharing by all eurozone members which many regard as the sine qua non of eurozone survival.

So hooray for that, George Osborne might say.

But there is a less welcome corollary for the UK of eurozone banking union, which is that it creates an identity of interest on banking and financial matters for the 17 members of the eurozone. This introduces the serious risk that the UK will always be outvoted when decisions are taken on the regulation of banking and finance in the European Union.

And, just to state the bloomin' obvious, this is one of the many areas where the UK has ceded sovereignty to the European Union.

To put it in stark terms, it is more than a theoretical possibility that the interests of the UK and the City in shaping financial rules will be systematically ignored or over-ridden.

This does not necessarily mean the EU will impose hob-nail-boot rules in contrast to a more delicately calibrated British approach (the notorious "light touch" of yore). As it happens, the most recent tension between the Treasury and the EU on banking was down to the Chancellor wanting the Bank of England to have the power to force banks in the City to hold more capital than a new Europe-wide minimum.

That said, Berlin and Paris have for years cast an envious eye over the way that London dominates financial services, including euro-denominated financial services. Twice as many euros are traded in the UK as in all the euro area countries combined, for example. London is responsible for half of all investment banking in Europe (according to the lobby group, the CityUK). As for international lending, Britain's global share is 19%, compared with 8% each for Germany and France.

Or to put it another way, a euro banking union, overlaid on euro currency union, could well have a solidarity of purpose in trying to mug the City of London.

It is not at all clear how the government will prevent the UK becoming an increasingly marginal voice in European financial policymaking. And although you might be tempted to think that the arcana of how banks are regulated is of little interest to you, the economic mess we're in would prove you wrong.

Which is why the eurozone's life-saving banking union could be the trigger for a momentous debate in Britain, about whether the centralisation of economic and financial decision-making in the currency union, arguably necessary to its survival, will inevitably push Britain towards EU exit.

Robert Peston Article written by Robert Peston Robert Peston Economics editor

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  • rate this

    Comment number 40.

    Another consequence of the flawed strategy that the UK should major on financial services with (even worse) a light-touch regulatory regime. The whole b-awful mess is being exposed piece by piece and the knock-ons will last for years. What madness supposed that a cartel of banks with an arm-lock round UK business would behave without avarice and greed. GB's sale of gold now looks insignificant.

  • rate this

    Comment number 39.

    It's easy, don't spend what you don't have, we have no money so giving away money to other countries when we haven't enough to run our own is a ridiculous situation to be in.

    Europe is a very expensive, unnecessary & wasteful exercise.

  • rate this

    Comment number 38.

    I think it is time to leave the EU. Quite a number of the present government are beginning to see sense in this. Could the BBC move a little away from fervent support for the EU towards a more neutral position. Thank you.

  • rate this

    Comment number 37.

    Guidelines, supervision, regulations, utter tripe. We need laws backed by the judicial system. Also, stop calling the financial sector an 'industry', it produces nothing except debt and misery. Yes, you can tax it but, why stop there, how about taxing drug cartels, smugglers and other criminal activities as well. Swift justice my ar#e

  • rate this

    Comment number 36.

    Cameron Shouldn't have thrown a Hissy fit and walked away from the negotiations last year then!

  • rate this

    Comment number 35.

    Time to catch up Robert

    We all, as taxpayers got mugged in 2008 when we THE TAXPAYER bailed out the banks! When we THE TAXPAYER took on the banks risk & since have "insured" THEIR toxic debt

    We THE TAXPAYER got mugged on sept 13 when the FED decided to print the $ into the ground & in doing so export INFLATION (2.2%) yeah right when fuel & food are going up 9% = oil $ INFLATION!

  • rate this

    Comment number 34.

    The proof will be when we see what the central supervision will actually mean. If it means forcing the under capitalised and "fantasy" balance sheet Spanish & Greek banks to up their game then this would be no bad thing. If it allows cavalier action by the more prudent banks then it could be a disaster.
    Expect the Germans , Finns & Dutch to fall out with the club med countries PDQ though.

  • rate this

    Comment number 33.

    To ConfusedMcr
    "Do we really think that Europe will somehow turn its back ...."

    Er, yes. The EU is rather fed up with our constant niggling. The absolute disaster of us leaving (or being politely eased out) looms closer.
    Hopefully, a referendum will show that most of us see sense and wish to remain within the EU.

  • rate this

    Comment number 32.

    Can Robert write in a way that is easier for the man/woman on the street to understand or put it another way plain english

  • rate this

    Comment number 31.

    If the customers/clients have a free choice of where to take their business then why the concern? If UK financial-services regulation is bad they will leave. If it is good, they will stay. The UK is at liberty to follow EU practices if they are considered superior.

  • rate this

    Comment number 30.

    It is not just the 17 members of the EZ but the large majority of the EU that will fall in line and who have voluntary signed up to to EZ style coordination. In the historic battle between finance capital and industrial capital where the former has always won the long term interests of the economy will be served by the City and its casinos descending a peg or two.

  • rate this

    Comment number 29.

    20 the duke

    At least creative people providing services dont sponge off the state.

    What value Do bankers really create when they simply shifting money from other peoples Pocket to their own pocket ?

    Do you ever get feel good factor working out of a Bank ?
    I thought not. Services such as a hair dresser leave people with feel good factor that is value they create so someone looks presentable.

  • rate this

    Comment number 28.

    Norway pop 5 m
    Switzerland pop 9 m
    UK pop 63 m
    Still want to leave the EU?

  • rate this

    Comment number 27.

    Greedy bankers policed by power-hungry eurocrats. Wonderful.

  • rate this

    Comment number 26.

    "Give me control of a nation's money and I care not who makes the laws."
    - Mayer Amschel Rothschild - Enough said.

  • rate this

    Comment number 25.

    You say the City and Financial services are important to the UK economy.
    It seems that they provide accounts that make the UK economy look better but when that money is called on it seems to be non-existent. When the economy is expanding they take their cut of the profits but when the economy shrinks we have to give them even more.
    The phrase 'accounting fraud' springs to mind. A successful one.

  • rate this

    Comment number 24.

    "Banks add 8% to 14% of GDP"

    But how much do they take away from GDP? Banks extract money from the economy via debt. They use their puppets to say high asset prices make people feel wealthier so they spend more. How exactly do you spend more when you have more debt to service? If banks hadn't forced a house price bubble, the economy would be thriving because people would have disposable income

  • rate this

    Comment number 23.

    it represents between 8% and 14% of national output or GDP

    It's not real GDP, it's a bunch of crooks gambling in a gigantic casino
    When it went belly up it brought the entire system down

    We got 20 years of smaller profits followed by one gigantic loss, exactly what happens with gambling addicts

    They kept doubling up their bet (fractional banking) and ended up bankrupting the whole family

  • rate this

    Comment number 22.

    Oh Robert! Grammar!
    The City of London is important but "the City or London and financial services" are important. The clue is the use of the word and denoting a plural.

  • rate this

    Comment number 21.

    I would compare the banks to a starving Pit Bull Terrier.

    It may be just a dog, but in its present condition is uncontrollable and dangerous.

    The consumer have been feeding the banks for years, but not content with that, banks were taking risks beyond sensibility that can lead to nothing but calamity.


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