Europe’s banks are right – the EU must act to avoid a Brexit cliff edge disaster
Retail king Lord Wolfson raised eyebrows at the weekend when he insisted that a no deal outcome to Brexit talks “would not be a disaster”.
The Next boss was referring to the overall effect on trade and, politically, he articulated his point well – you have to be prepared for no deal in order to strike the best possible deal.
There is, however, one aspect that would be a disaster – the financial shock if trillions of pounds’ worth of contracts are left in limbo following a cliff-edge scenario.
The Bank of England has been pleading with authorities in the EU to meet half way and guarantee cross-border access to financial institutions in the event of the UK crashing out of the bloc without an agreed transitional period.
One of the key risks concerns around £30 trillion worth of cross-Channel derivatives; contracts are typically cleared in London and cannot simply be switched to rival clearing houses in mainland Europe. Time is running out, with Christmas widely considered a crunch point, roughly three months prior to the Article 50 deadline.
Pressure on the EU to act is intensifying, and not just in the UK. Yesterday, the Association for Financial Markets in Europe, a lobby group for the continent’s biggest banks, wrote a public letter to the European Commission’s head of financial stability regarding the “urgent need…to address risks to financial and market stability” in the event of a no deal Brexit.
The EU cannot simply replicate London’s clearing services, and certainly not over just a few months. If its negotiators believe they can use this issue as leverage, they betray a gross misunderstanding of how Europe’s financial sector and broader economy operate.
High stakes political negotiations will always involve an element of brinkmanship, and game theory dictates that last-minute deals are likely. However, both sides of the Brexit negotiations have a duty to remove mutually-destructive eventualities from the table. The UK has signalled its willingness to do so and it is high time Brussels followed suit.