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
    -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
    -13

    Comment number 10.

    Being no expert on these matters I do have observations on the banking sector as a minion in society. I believe that the casinos (as called) neds to be called, and we have a poweer struggle with London, New York and any of European capitals. Adapt or die.

  • rate this
    -12

    Comment number 120.

    112 Little_old_me

    I disagree with you as a result of watching the British medias response to nearly everything the EU does. The BBC is as guilty as all the rest of them or misrepresenting the EU and as per normal (For British media..) giving a very loud voice to dissenters BUT NEVER EVER allowing pro euros on the main news programs.

  • rate this
    -9

    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
    -8

    Comment number 80.

    UK politicians think that they are living in 1912. They are out of touch. The UK economy is not the biggest and best in the world. We need to be part of a currency union to survive. If we leave EU our currency will be massively devalued, our imports of food and raw materials will cost more and who will buy our goods in the EU, where we will be regarded as traitors.

 

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