EU struggles to find way forward on financial services after Brexit

The EU is losing its way on financial services.

Britain’s departure from the bloc could have created new momentum for the EU to build up its capital markets or complete a single market for banking. As Fabrice Demarigny, a former French regulator who chaired a key group on capital markets, put it in 2019, Brexit was creating a “quite a vivid sense of urgency.”

Yet nearly three years later, Brussels is struggling to articulate a clear post-Brexit vision. Instead, the financial services agenda is languishing, with no single country stepping in to fill the U.K.’s shoes and drive the debate forward.

“Pre-Brexit, the U.K. clearly was shaping the debate on financial services,” said Nicolas Véron, senior fellow at the Bruegel think tank and the Peterson Institute for International Economics.

“They were proposing stuff and having informed opinions on everything,” he explained. “They were kind of a central node of debate on financial services policy. Other member states just had … to react to British positions, or to push or pull. That’s gone.”

The EU’s “capital markets union” and “banking union” projects are also at risk of turning into empty slogans, with broad agreement on the aims but no real sense of what they should really involve.

“We have slogans because we don’t have a project or a vision,” said Véron.

A case in point is the masterplan concocted by Eurogroup chief Paschal Donohoe to break through stalemate on the banking union. It got a cool reception on Tuesday, as finance ministers from most countries remained entrenched in their national positions.

“I am … certainly not saying that our differences have been settled,” Donohoe conceded on Tuesday. “Banking union remains a very complex project, both technically and politically.”

Market connections

The U.K.’s departure has also left Brussels with less direct contact with financial markets.

“There’s no feeling for what’s going on with the markets,” said Karel Lannoo, chief executive of the Centre for European Policy Studies. “Now [that] the U.K. left, I don’t hear much of a market view in Brussels.”

“We have far too regulated capital markets and we need to have much more flexible, more adaptive regulation,” he added.

The EU is still keeping a close eye on the U.K. — which isn’t waiting around for EU market access anymore.

A document, obtained by POLITICO under a freedom of access request, shows the Commission briefed experts in EU capitals on a detailed breakdown of the differences between its markets reforms and those being pursued in London.

The unusual step shows just how closely Brussels is following moves on the other side of the Channel — and indicates areas where the EU and U.K. are now heading in opposite directions.

That’s because, despite the lack of a big-picture vision, there’s still a lot of financial services legislation going through Brussels. One of the biggest capital markets reforms working its way through the legislative machine is an effort to create a ticker tape for shares and other financial instruments.

The consolidated tape, which has existed in the U.S. since the late 1970s, could help market players locate the best price and volume for their trades across disparate EU markets. Without London, EU markets are fragmented across multiple financial centers — like Amsterdam, Dublin, Frankfurt, Luxembourg and Paris — and different types of trading venues.

But the complex package is unlikely to bear fruit for at least five, if not 10 years, in Lannoo’s view. “It is important, but this is probably not the priority,” he said.

The EU should be focused on tackling the high fees that fund managers charge for managing people’s savings and creating a single supervisor and single process for public listings, he added.

A major hurdle is that the debate over the consolidated tape is heavily polarized. Stock exchanges, investment banks, fund managers and even retail investors are all at war over the exact design of the project.

Exchanges, for example, are resistant because a tape would eat into their revenue model. That creates a political problem because individual capitals don’t want to hurt their own national trading venues.

“There is a real plurality of views,” said one lobbyist in favor of the tape. “There’s absolutely no common vision.”

The outcome is likely to come down to political horse-trading between countries. “That’s where we miss the U.K. most keenly because at least there was a convinced free-market proponent,” the lobbyist said.

Strategic autonomy

And then there’s France’s “strategic autonomy” agenda, which has gained renewed impetus from the war in Ukraine.

For financial services, the more protectionist slant is most apparent in the debate over euro clearing. The Commission is actively trying to force a shift to the continent to strengthen its financial system and build up capacity on the continent, despite the protestations of market players.

The challenges in dislodging clearing — which could create its own risks to financial stability and result in EU players paying more — means so far the EU has had little success. Clearing remains the one area of U.K. financial services with continued EU market access.

Still, the desire to move clearing within the bloc is part of an emphasis on cutting reliance on the City of London — fitting into the strategic autonomy agenda.

But the inward focus also runs counter to the basic principle of open financial markets, leaving Brussels preaching a sometimes-contradictory vision.

“It is about standing on our own two feet, about being confident of our place in the world, while remaining open and competitive,” said Mairead McGuinness, the EU’s financial services chief, in a recent speech that controversially compared the EU’s dependence on Russian oil with its reliance on London clearinghouses.

McGuinness, who took office promising to put consumers first, has also pitched plans for an “ideas forum” with industry and citizens on the future of finance — likely after the summer — which will try to look at the “bigger picture” and tackle issues like climate change and digitalization. There’s also plans for a retail investment strategy toward the end of the year.

The forum could help the EU sketch out what it really wants from financial services, including how to draw the line between a robust financial system and open markets.

Paola Tamma contributed reporting.