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March 07, 2017

Dinner in Versailles

It is always easy to dismiss as meaningless European summits or mini-summits in which nothing new gets said on the record. But sometimes they do matter, as did yesterday’s dinner between the leaders of France, Germany, Italy and Spain. They are the four largest eurozone countries - though they didn’t meet officially in that capacity. And they reached a consensus that they now favour a multiple-speed Europe, a notion Angela Merkel rejected not too long ago. While these are tags that have yet to be filled with content, this marks an important step. The Lisbon Treaty's strengthened provisions for enhanced co-operations were intended primarily for the eurozone. Under the German interpretation of EU law, that would still not constitute a sufficient avenue towards a joint fiscal policy, but enhanced co-operation would allow the core member states of the EU to do a lot more than they have done in the past. François Hollande, who hosted the dinner at Versailles, said that Europe should not be reduced to a single market and a single currency, but should strengthen its political dimensions. The status quo is unsustainable. The leaders agreed the broad areas in which they want the EU to progress: wealth creation, fight against terrorism, border security, and a common defence. For the moment this is about as we far as we got because there are big differences even among those four on how far to go. But we noted Merkel’s statement that the EU needs to have the courage to allow some countries to press ahead when others won’t. Nobody is forced to participate, but nobody should be excluded. We expect to hear more of this during the Rome anniversary summit.

None of this goes nearly as far as people like us would have liked, but starting from where we today - which is not the ideal starting point - this is a useful first step for as long as there is a clear strategic perspective behind it. We would caution against the hasty construction of a defence union at a time when the monetary union remains largely dysfunctional. Our advice would be to take practical measures on defence co-operation, like a defence procurement union. But most of the focus should be to fix the monetary union, and to make it a sustainable environment for all of its members. Given the overlap between the eurozone and the Schengen area, it would also be useful to strengthen the security aspects of Schengen. But summit hyperactivity should not deflect from the fact that the eurozone still needs to fixed, and you are not going to fix the eurozone by adding another dysfunctional area of policy integration. In other words: solve the old problem, don’t create a new one.

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March 07, 2017

The shape of Brexit financial migration

Bruegel has put out a report estimating the size of the future migration of financial services from London to the EU-27. The recipients of this migration will be mostly Frankfurt, Paris, Dublin, and Amsterdam, which will experience a big shock to their infrastructures given that currently they host much smaller financial sectors and smaller numbers of multinational firm headquarters. The report estimates that some 30,000 jobs will move to these four cities. Because of the expanded need for, in particular, foreign exchange trading, the trading floors of banks in the EU27 will have to expand substantially. 

Bruegel expects the EU-27 wholesale financial market to be dominated by Swiss and American investment banks, one large German bank (no prizes for guessing which) and three French banks. Large Italian, Spanish and Dutch banks will comprise a second tier. 

Germany and France have some clearing capacity, which will have to be expanded to accomodate the increased activity. There is a big question mark on what the FinTech industry will do, as it is currently largely concentrated in London as well.

As to the legal system, there is an expectation that the EU27 financial sector will be able to continue operating largely under English law - this is relevant, of course, to wholesale banking (derivatives, repos) and not to retail banking.

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