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 680.

    #677 Peepsaltea - hopefully, the painful period is just PMT.

    Finance and banking got its knickers wrapped around its knees - banking was bonking. Market forces are rather difficult to apply if the country has.... no money or banks. Sheesh...... oi vey!

    Greed has to be managed, with straight jackets - you got that right. :-)

  • rate this

    Comment number 679.

    I'm a bit of a latecomer to this debate. Robert you suggest that the banking union might trigger a debate which will eventually push us to leave the EU.

    We must never allow this - or anything else - to force us out of the EU.

    No, no. no.

  • rate this

    Comment number 678.

    Bastiat, those writing your references understood how money making occurs and each, in their various ways were obsesively insane with the fact that they could not crack unlimited personal wealth. They were obsessed with money. They were/are insane - that is the perspective of their work. You omitted keynes, he was well rounded, sensible and had a decent life. He left worthwhile important insight.

  • rate this

    Comment number 677.

    Well, well, well! so the "City" suddenly has it's come-uppence!

    You all wanted deregulation......and look what the result was!

    The city was/is so valuable to the UK economy....... so why did we let this happen?


    History in the making folks - a painful period of history.

  • rate this

    Comment number 676.

    "between 8% and 14% of national output or GDP"
    That's not a good enough reason to perpetuate scams, money laundering, tax dodging and political corruption.

  • rate this

    Comment number 675.

    @673 Purple
    Did u get ur picture of the world of economics from Das Kapital? If u destroy the incentive for profit what will happen? Ur argument is so fallacious & full of sophistry it beggars belief that someone could consciously embrace it. Read nobel winner F Hayek, or H Hazlitt, or Peter Schiff or Bastiàt. Just google them & then wake up to why the USSR's ideas are in the bin for a reason eh.

  • rate this

    Comment number 674.

    I disagree that companies are sitting on £s in a moneybin like Scrooge McDuck while that moneybin of £s gets eroded by continual BoE QE.

    Ur argument doesn't hold water against my remarks @616. If its the best job in town, & the applicant VOLUNTARILY chooses it, would u deny him that employment or impose unemployment or even worse conditions???????

  • rate this

    Comment number 673.

    #672 further - Many, many, foreign companies skip avoid taxes to UK on their earnings here and that should end. It might be looked upon as double edged sword in respect Uk business abroad but in honesty,that is purely dictyledon obtrusion.

    The cash piles are invested offshore awaiting Mitt Romney elected to get rid of tax laws requiring 35% paid to the US Govt.

  • rate this

    Comment number 672.

    I fear the only way you would ever understand the point would be if you spent a year or two on the ipad production line.

    You're assumptions about reinvestment are invalid - companies are sitting on huge piles of cash right now.Billionaires hoard mountains of cash in places like Jersey.That wealth is not used for the benefit of the country or it's citizens.

  • rate this

    Comment number 671.


    OK. Black Wednesday...

    No matter - both were City events...

  • rate this

    Comment number 670.

    I understand that article but it doesn't disprove anything @616. What do u think billionaires do with their £s? The can only buy so many cars. They either a) reinvest it in their own business b) invest it in other businesses, c) save it at banks who in turn loan these £s out in hope of a return to the young bloke trying to set to a landscaping business for eg. A, b, c create more jobs!

  • rate this

    Comment number 669.

    #663. Jimbob

    Hah. The gnomes of Zurich against Little England eh?

    Except of course Zurich is in Switzerland which isn't in the EU.

    And the gnomes were the City itself.
    You cannot buck the market as some old bag lady said.

    No. Black Monday was a product of the mighty City itself.

    After all it is the biggest player in the EU.
    Read the article. Then come to conclusions.

  • rate this

    Comment number 668.

    As for Apple. I agree does all it can to lower costs.
    No it doesn't

    Your comments at 616 represent (part of) the problem - my subsequent responses should have made that clear.

  • rate this

    Comment number 667.

    #664 - Sage - in or out of it, UK should pick a huge fight now with the established norm of EU process and throw the kitchen sink into it. We are experts at the cunning required to undermine what is, a totalitarian system of impositions and arrogance. There is no better issue to bring up than the Greek problem and l pray DC and his guys wake up to the benefit of monkey wrenching EU complacency.

  • rate this

    Comment number 666.

    @665 Billy:

    As for Apple. I agree does all it can to lower costs. But, what do u think of my comments @616? I think it puts succinctly the Austrian school's position, Ron Paul's, & mine :)

  • rate this

    Comment number 665.

    It's not an aversion - simply a reflection of fact. The corporate giant is sitting upon a colossal mountain of money whilst it's workforce is impoverished and treated appallingly - ok, I know things have, apparently?, improved and Chinese standards of living are lower but that's no excuse,
    Apple may innovate, but it also stifles through over zealous IPR.

  • rate this

    Comment number 664.

    663. Jimbob

    "Time for us to go. Give the people a vote "In or Out". Enough of this Europe nonsense... Let's leave them to it and move on. They have more to lose with us leaving than we have. Good bye to bad rubbish."

    Unfortunately nearly half of our trade is with Europe. Problem is they think the solution is more loans (more debt)! Europe needs a democratic interest-free money supply. As do we.

  • rate this

    Comment number 663.

    Time for us to go. Give the people a vote "In or Out". Enough of this Europe nonsense. They landed us in it with the EMU back in the early 1990's and have shown their true colours again and again. Let's leave them to it and move on. They have more to lose with us leaving than we have. Good bye to bad rubbish.

  • rate this

    Comment number 662.

    FM operated for profit is a dangerous ruthless beast, where many believe their hyped advertising and that they are worth their remuneration and bonuses.

    In essense what is demanded by de-regulators and free market pundits is return to the jungle, its laws of survival and wild west frontier of good guy bad guy. It is neanderthal, it is a rite to dodge taxe

  • rate this

    Comment number 661.

    Can u elaborate on ur aversion to Apple, I don't understand sorry. (Despite disagreeing with ur P.O.V. I do respect it :)


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