Speakers of the session
Towards further integration or disintegration in the EU and potential impacts for the EU financial sector and economy
MEP and Chair, Committee on Economic and Monetary Affairs, European Parliament
Chairman of the Eurogroup Working Group and the Economic and Financial Committee, Council of the European Union
Chairman of the Corporate and Investment Bank, J.P. Morgan
Axel A. Weber
Chairman of the Board of Directos, UBS Group AG
Objectives of the sessionThe European Union (EU) faces serious external and internal challenges: massive increases in migration flows and the threat of terrorism on the one hand, weak growth, demographic decline, possible Brexit and high levels of indebtedness of several Member States on the other hand. Euroscepticism is on the rise in almost every Member State. All these challenges are continuing to test the cohesion of the Euro Area.
The objective of this plenary session is to discuss the potential impact of such fragmentation on the EU single financial market, the EU financial industry and the funding of the EU economy and also to define the priority actions that should be implemented to minimize the impact of such fragmentation on the financial system and the EU economies.
Points of discussion
- What are the main fragmentation trends/risks that the EU is facing at present (possible Brexit, threat of terrorism, increasing nationalistic approaches, divergences in economic policies...)? What could be the potential impact of such fragmentation on the EU single financial market, the EU financial industry and the funding of the EU economy?
- What can be done to minimize the impact of fragmentation on the financial system? What are the priority actions required at national and EU levels to relaunch productive investment and growth in Europe? What measures or mechanisms could increase support for reforms at the national level?
Background of the sessionThe European Union faces serious internal and external challenges. High levels of unemployment, the lack of a credible growth narrative, the refugee crisis, the terrorist attacks and the risk of rising right- and left-wing populism are undermining the broad support that European integration has enjoyed since its inception.
Although the Eurozone has deepened since the financial crisis both institutionally and in terms of risk sharing (e.g. ESM, Banking Union etc.), at the same time, it is subject to economic divergence, and hence has to weather substantial political controversy. In addition, the rising effects of populist parties across EU Member States are challenging the political consensus on deeper integration. Meanwhile, already on the margins of the EU, the U.K. is holding a referendum on its continued membership of the EU on June 23.
No one can predict with confidence what the impact of Brexit might be, notably because of the wide range of possible post-Brexit deals that could be struck between the UK and Europe. But it is relatively straightforward to identify the sectors of the British financial services industry that have developed to date, at least in part thanks to their single access to the rest of the EU. These include foreign currency trading, particularly in the euro, investment banking, insurance and cross-border sales of securities.
For instance British banks take advantage of the ability to “passport” around the EU from the UK exporting services without setting up fully-fledged local operations. In the same vein, if insurers did not have the freedom to conduct cross-border business as they do now, and had to set up operations across the EU, there would be significant cost increases. Brexit could also divert a substantial amount of financial business away from London to other non-IK locations in the medium term. Moreover some EU countries would also be vulnerable to contagion if Britain were to leave the EU. In other words Brexit could lead to an EU “détricoté” or unravelling of the European integration project.
To address this risk of fragmentation, a strong and common European reaction is required.
Firm leadership and enhanced coordination is needed to ensure a stable macroeconomic environment within the EU. Innovation and developing all forms of SME financing are critical for economic revival. Firm and ambitious deadlines for CMU, with rigorous monitoring by the Commission would boost economic confidence. Given the persistent low growth environment, specific emphasis should be given to the effective implementation of structural reforms. Member States have to implement what they agreed to in the past to kick-start growth. This is also a pre requisite for strengthening the Economic and Monetary Union (EMU). Any progress to deepen EMU can only be built on Member States that converge economically or at least are implementing structural policy measures leading towards that goal.
Too much time and opportunities have already passed despite the lasting very low interest rates. Domestic structural reforms are indeed the main and even only way forward to boost potential output and productivity growth and to reduce unemployment, which remains too high in many Member States. Not all European countries experience the same problems but it is imperative that all Member States design and implement these structural policies and ensure stable public finances in accordance with their commitments.
EU Institutional leadership would also be helpful in this regard. Europe should indeed be more present in the monitoring and in the accompaniment of these national measures. The EU Commission can, for instance, be vested with more powers to address non-compliance with structural reforms. Providing a fiscal incentive for Member States that really embark on credible reforms – the more fiscal transfers with more conditionality – would also be an appropriate way forward to encourage the commitment of Member States to such policies. In any case hopes for easy solutions from expansionary fiscal or monetary policies are misled: these policies cannot foster even meagre growth while high levels of public deficit and indebtedness leave no room for manoeuver to short term fiscal impulses.
In a Europe of variable geometry, energetic leadership is required for a deeper integration of countries into the euro area whilst finding a balance among the competing interests of the remaining EU Member States. Furthermore continued integration in the euro area should not undermine the Single market, and non-Euro area countries should not impede a deeper Economic and Monetary Union. These two objectives are not contradictory as shown by the current implementation of the Banking Union.