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, economics editor Article written by Robert Peston Robert Peston Economics editor

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  • rate this
    +2

    Comment number 200.

    Capitalism and greed are the twin monsters that motivate the City.
    They are also the root cause of the useless misery currently inflicted on EU citizens of Greece .
    Austerity is not the answer . It stifles national economic growth and destroys any chance of economic recovery.
    This applies equally to the EU and the UK

  • rate this
    +2

    Comment number 199.

    The prominance of the City overly distorts the UK economy. This is seen in the way the City sucks in hordes of top quality Maths and Physics grads (for low latency trading engine development), from the best universities, that are then not available for UK science and industry. This boil (the City) needs to lanced very carefully the EU banking Union could help.

  • rate this
    0

    Comment number 198.

    175.BikerJake


    Was the removed post off topic, lke this one you are moaning on? If it's off topic it'll be removed, stop being paranoid.....

  • rate this
    +1

    Comment number 197.

    Instead of everyone worrying about how a bunch of irresponsible gamblers operate in the square mile, we should protect our competitiveness for the future and invest in research and development. Especially in the sustainable energy market. Make us a leading exporter of energy solutions and we'll be back at the top when the oil runs out. Just saying

  • rate this
    -1

    Comment number 196.

    'Sceptics' need to look at a map and see the way the world is dividing up into economic blocks. If we are not in one - arguably the best one - we will be but as a piece of grit between them.

  • rate this
    -2

    Comment number 195.

    Cont'd from 173: Nor do we have fantasies of an Empire that died long before we were born. Whilst you brand yourself a "SixtiesSurvivor", the reality is more "StuckInTheSixties", living in fear of what happened when you were young and using that to justify holding us in slavery to post-War ideals. I'm 42, born when this was all decided for me, I have no memories of a time of fear and hatred; - TBC

  • rate this
    +1

    Comment number 194.

    172.Dodo56
    1 Minute Ago
    An EU exit would be a disaster as we would then lose all trading rights with our biggest export partners and foreign maunfacturers would pull out of the UK
    **
    Don't be silly. Trade is determined by the competitiveness and quality of goods and services, not by 'rights'. We traded with European nations before the EU existed and will do so after it collapses or we leave.

  • rate this
    -17

    Comment number 193.

    At the end of the day the whole argument is mute
    The guys who run the financial system don't like or trust the Germans because of WW2

    So there will be a mass exodus of private capital if Berlin gets control of London

    Plus ça change, plus c'est la même chose

    The more things change... the more they stay the same

  • rate this
    -2

    Comment number 192.

    @183

    Because British approach to Europe is the same as an over dramatic teenager; do what she wants or she'll down the whole bottle of painkillers.

    Sometimes you just have to call their bluff.

  • rate this
    +1

    Comment number 191.

    So after bankrupting the country for years to come, ripping us off systematically via libor fixing and other scandals, we all have to come out of the EU because some bankers in the city - might loose some money?
    Enough of this !! - we have and still are paying a terrible price for this parasitic industry - which does not give a hoot about the domestic economy or anything else outside of the M25

  • rate this
    +3

    Comment number 190.

    Yea right lets blame the Boggie Man called Europe why do people in this country play and allow themselves to be the little islanders.Just remind me who got us into this mess in the first place never mind though no doubt they will get us back on the horse only to do it again in 30 years time and then tell us sorry we gambled your pension away (yet) again

  • rate this
    +1

    Comment number 189.

    putting more legislation in and tighter controls on how much banks hold is the reason the 2008 recession is still dragging on today. Does anyone really believe that sub prime lending (the cause), would happen today? The clue that we don't need legislation is in the fact that 1929-2008 we had no banking crisis in other words it works.

  • rate this
    +1

    Comment number 188.

    164.piroflip
    Just now
    I see that Cameron is hinting at a referendum on Europe again "after the next election". He has as much intention of letting us decide our own future as Brown did.

    because, despite the rabid howls of his party, he knows, and is well advised, that leaving the EU is a non runner and would ruin us. He cannot, as PM, allow the lunatics to take over the asylum.

  • rate this
    -3

    Comment number 187.

    After the icelandic revolution it was decided to change the constitituion so as not to pay back the debt. Go bankcrupt, why cant we do the same and start a fresh?

    http://en.wikipedia.org/wiki/2009_Icelandic_financial_crisis_protests

  • rate this
    -2

    Comment number 186.

    Isn't the wealth created by banks, in a way, false? They create theoretical money based off of interest and investments in the hope that it will solidify - only for it to go into a very few pockets. All the while the youth are told to dream big and believe in the British way of justice and meritocracy. Sigh.

  • Comment number 185.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this
    0

    Comment number 184.

    Whether we are in or out of the Banking Union, the Eurozone will want to monitor our banks when operating in the Zone. They will have to have sufficient reserves for their operations there, maybe deposited with the ECB. We might as well join!

  • rate this
    +4

    Comment number 183.

    "will inevitably push Britain towards EU exit."
    why won't it push Britain into joining the euro so we can be properly involved in these useful move?

  • rate this
    +1

    Comment number 182.

    Robert, normally I like your incisive an informative take on things, but can we drop this jingoistic protectionism. To quote your article - "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."

    That's called democracy and is probably more than needed to protect us.

  • rate this
    +1

    Comment number 181.

    166.massive_cynic

    I dont think that GE/FR are having any hidden agenda away from solving the crisis.And it is simple a fact that the current crises started
    in the Financial Sector.UK was offered a equal role but that was never accepted.Starting by not joining the Euro and also within EU derivate trading
    laws was a 26 yes to 1 ( UK ) no.

 

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