Commentary on Philip Stephens’s article in the Financial Times of 16/10

Britain’s EU choice — realism or emotion


Mr. Stephens’s article is quite compelling but incomplete: indeed, some of the requests attributed to David Cameron are, as he writes, simply “motherhood and apple pie” and should not create major problems: who would disagree with improving competitiveness or simplifying bureaucracy? Other points deserve, however, further development and one in particular - the Scottish question – appears to have been totally overlooked.


The first question concerns trading “full-on treaty change” for a protocol on the Danish model” which “would be binding on the other 27 EU states, and, where necessary, its provisions would be incorporated into the EU treaties when they were next renegotiated”. Such an approach is only conceivable to the extent it is limited in scope and excludes any provision that would grant future rights limiting the freedom of other Member States. While it could well apply to the request to “exempt the UK from the integrationist ambitions of its partners”, it should absolutely not draw clearer lines between members of the euro and those who have kept their own currencies; or, more specifically, guarantees that the former will not ride roughshod over the latter and so damage the City of London”. 


It is indeed inconceivable that Member States commit to future treaty changes ahead of a full Intergovernmental Conference that would potentially limit their sovereignty by granting to others rights over their domestic policies. It would make a nonsense of the ratification procedures (be they parliamentary or by referendum). Protecting the City of London cannot interfere with integrating further EMU which is a necessary condition for the single currency’s survival and a far more important objective for the future of the EU as a whole.


David Cameron’s strategy is clear: securing the future of the City and presenting it as a sufficient argument for continued EU membership and avoiding a Scottish breakaway. The fear of the latter is precisely the “emotional argument” that Mr. Stephens deplores is missing in the campaign. The “ins” however are loath to put forward the Scottish argument (which is tactically their best); this explains the refusal of the SNP to join their campaign.


This strategy is further underpinned by Lord Hill’s (and President Juncker’s) efforts to push ahead full speed with the Capital Markets Union which, if sufficiently advanced before the referendum, is meant to show that the UK cannot withdraw from the Union. This is of course pure bluster since CMU is an ill-conceived project in the first place: among other flaws, it is “multi-currency” (a first) and has little scope for unifying the 28 fragmented financial markets of its members. Nor will it deliver its objective of shifting the weight of bank financing towards increased capital markets funding. Its main purpose is to secure the dominance of the City, in particular by attempting to preempt underwriting and distribution fees connected with the issuance of securities; the desired EU “protocol”, locking in safeguards for the City, is supposed to prevent future challenges by other member states.


The PM is also betting heavily on the preference of all members to keep the UK “in”, but this desire (which I share) should not come at any price. The EU should not hesitate to wave Scottish EU membership as the alternative to the PM’s transparent attempt to impose and secure the long term primacy of the City. No one disputes the City’s expertise and its claim to be Europe’s foremost financial center, but it should defend its position through its superior competitiveness (hear, hear) and by joining EMU (it would then be unbeatable) but not by securing the protection of a Treaty to impair the freedom of other member states to take whatever measures are deemed appropriate to allow EMU to deploy its full advantages.


This last point is all the more important in light of the rapidly developing ambitions of China to impose the Yuan as a fully-fledged reserve currency. This initiative which includes many facets (convertibility, inclusion in the SDR), aims in particular to create a rival international payments system domiciled in Shanghai. This should be welcomed in so far as it would provide a credible and safe alternative to the existing quasi US monopoly. From an EU point of view it should encourage monetary authorities to establish an independent “Euro” based payments system which, as long as the UK remains outside of the Eurozone, would necessarily be based on the continent. The EU protocol “safeguarding” the city’s interests should never become an obstacle limiting the possibilities of the Euro to become itself an international means of payment rivaling with the $ and the Yuan.


An additional topic relates to the question of the future architecture of the European banking sector discussed last week by Barclays bank and by President Oudéa of Société Générale. While not directly related to the UK/EU negotiations, the European “universal banking” model, has a direct bearing on the competitiveness and profitability of financial institutions. Preserving the “universal” model, which includes per force the protection of its depositors, implies structurally higher capital requirements delivering lower levels of profits. One answer lies in “ring-fencing” the deposit taking Institutions, possibly within a “holding company” structure (this proved efficient in the AIG debacle where the healthy regulated insurance subsidiaries were not contaminated by the insolvency of the holding company and its “trading” subsidiary). Appropriate regulatory safeguards must be imposed to limit the exposure of the ring-fenced entities to their holding companies. The answers given to this question will deeply influence the implementation of CMU which we have identified as a key element in the UK/EU relationship. The questions involved implicate the stakeholders in the global financial markets concerned with the G20 agenda on financial stability in all of its aspects. Definitive answers cannot be resolved within the time left before the British referendum which is an additional reason to preserve flexibility in this highly technical area that is not suited for intergovernmental political horse-trading!


Those in charge of representing the EU/EMU interests should constantly keep in mind all of these factors and their far reaching implications. Whatever concessions may be made to the UK in the end, they should never be allowed to deprive other members the very freedoms and safeguards that Britain claims for itself.  


Lorgues, 16th October 2015



Paul N. Goldschmidt

Director, European Commission (ret.); Member of the Steering Committee of the Thomas More Institute.




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