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 100.

    @ 92.vikingsarecoming
    You really think it would have been any different if the Lib Dems or Tories were in power. Any government is about the good times rolling, that's how they stay in power. Labour, Tories, Lib Dem or Raving Loonie Monster Party!

  • rate this

    Comment number 99.

    Whatever happened to 'rebalancing the economy', away from dependence on the City of London and its dodgy ways? The City's interests are not the same as those of the UK generally - far from it. A stable, peaceful Europe, on the other hand, definitely is in our interest. It is shameful that Robert Peston still seeks to conflate City interests with those of the rest of us.

  • rate this

    Comment number 98.

    @Micki - 'If we leave EU our currency will be massively devalued, our imports of food and raw materials will cost more.'

    There is no proof of this. If we leave we'll have no restrictions on trade deals as we do now. We import a lot from the EU and they'll still want our money once we've departed. They rely on it

  • rate this

    Comment number 97.

    That little country within London " The City " will get whatever it needs from Government, we are irrelevant.

  • rate this

    Comment number 96.

    All this hate towards financial people, as a matter of fact i'm in uni studying int. finance and fund management, the reason? If the government cared about the real economy and invested in science and engineering, I would have followed my dad and studied engineering, just i'm not dumb and know that the city and the banks is where the real money is. ps I don't gamble, I research for 4 years.

  • rate this

    Comment number 95.

    lets not forget you still need talent to run these banks and with Switzerland under pressure from the US to fall in line, France's high tax on higher earners coupled to and lets not forget, The German / Austrian banks have done more harm to the EU economy than the latest scandals in London, the London Banking Sector will reform and come out stronger

  • rate this

    Comment number 94.

    well we cant seem to control our own banking sector, we are just mugged out of our taxes by them.
    maybe europe can do it better..... that is why our bankers worry

  • rate this

    Comment number 93.

    Of course Euro leaders would love a bigger piece of Londons financial sector but this all depends on whether they can save the euro, fix the debt crisis, adopt closer fiscal union and agree that Brussels controls all 17 member states. Yeah like that is going to happen. Big city bankers should relax, your obscene bonuses are safe!

  • rate this

    Comment number 92.

    When the entire banking system went to the brink of collapse, and in the process hobbled our economy for years to come

    Still not blaming Labour for their contribution Mr Preston?

    Supervision had been under Labour control for 13 years, and the debt mountain we now have can be laid squarely at their feet- but people still try and blame just the banks?

  • rate this

    Comment number 91.

    @84 ~ Most bankers are decent hard working people who don't enjoy the mega-bonuses of the minority whose greed and criminal behaviour have brought the industry (& wider economy) to it's knees.

    Would you have these 100s of thousands of ordinary workers lose their jobs for the actions of minority rather than just prosecute the latter?

  • rate this

    Comment number 90.

    Perhaps rather than fret over protecting our banking system we should, given the way that our economy has been damaged by it, be looking to bolster other contributors to our GDP.

    Manufacturing is still our biggest contributor and yet receives, by comparison with the financial sector, very little actual support.

  • rate this

    Comment number 89.

    Where is the wealth 'creation' when there are no taxes on trading on CoL UK markets? Incredible ! NO TAX !!!
    Ah, it must be that great philanthrope, 'the trickle down effect'; when the traders go off to Starbucks and buy a hard earned coffee...

    Ever notice how some people salivate when hearing the word 'MONEY'?


  • rate this

    Comment number 88.

    As a soveriegn nation and outside the ECB we should be able to cherry pick elements of any ECB requirements which are good for the UK. We need to be flexible and proactive which the juggernaut of the ECB will never be.

  • rate this

    Comment number 87.

    There is an argument to say the UK is already on the edge when it comes to the real "wealth" within the EU

    "The city" is a casino run by mobsters (plenty of evidence coming out for that....even during the last few months we have seen; LIBOR , AIG, the Goldman Sacs whale, MF Global Gold theft by JP Morgan all run through "the city"!

    when it comes to GOLD RES on the other hand GERMANY IS BOSS !!

  • rate this

    Comment number 86.

    "Berlin and Paris have long cast envious eyes over the way that London dominates...."

    Despite its deliberate scare-mongering tone, playing on fears of nasty foreigners, Robert's article is in fact a strong argument for the UK to join the eurozone as soon as possible.

    We have to choose between being a leader or a backwater: imagination or fear.

  • rate this

    Comment number 85.

    Yet even more power to Germany, I think we all forget that the Eurozone needs us just as much as we need them. The sooner we're out of this ageing and deteriorating union the better. Vote UKIP

  • rate this

    Comment number 84.

    @75 Fred:

    Why don't you get a job in banking then? If it really is as simple as the media make out then all you have to do is turn up, gamble other people's money and if you win you can make MILLIONS, no BILLIONS!! What are you waiting for? Let's all do it.

    Incredible how easily some sheeple are influenced by a few bits of media hype. Next you'll be claiming MP's are bent with their expenses

  • rate this

    Comment number 83.

    Robert Peston and Euro-sceptic politicians (who think they represent 'the British people' - but really don't), need to look at a map and see that the UK is in Europe, irrespective of the EU and the best way to protect the UK's interests in Europe is for the UK to engage at all levels in the EU and stop whinging from the sidelines.

  • rate this

    Comment number 82.

    Question should be the other way round. It seems to me that Britains banks led the way in developing and fostering the disgraceful practices that brought the finance system to a grinding halt, ably abetted by US mortgage lending.

  • rate this

    Comment number 81.

    Read "Strengthening Economic Government in the EU - Report of the Task Force to the European Council Brussels, 21 October 2010" signed by All the Economic Ministers of the EU countries, including Mr G Osbourne for the UK. Its all there.

    The UK has only one way to move forward and that is full commitment to the EU including adoption of the Euro. That or continue the decline of the last100 years.


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