Position Paper on a European banking union
The United Kingdom
The United Kingdom welcomes a discussion of common banking oversight as a key instrument in stabilizing financial relations across the shaken Eurozone. Recent years have painfully exposed the insufficiency of the status quo to protect both the Eurozone from financial crises that engulf its neighbors and partners as well. Yet if substantial steps are necessary, negotiations for a Eurozone banking union must also stress pragmatism and the prudent protection of the diverse interests of all EU Member States. We must focus on concrete measures directly related to strengthening Eurozone financial actors, not rush to unrelated grand initiatives merely to show action against the backdrop of crisis.
II. Background to the British Position
As home to Europe’s largest financial center, with roughly 36% of the EU’s financial business, the United Kingdom has profound interests in financial stability across the continent. Even were our financial concerns not so strong, economic stability in the Eurozone would be of fundamental importance to the British economy because it accounts for 58 per cent of our foreign trade. The UK is in a position to participate in some efforts to respond to these challenges, and may encourage others among Eurozone members. At the same time, it must also safeguard the distinct interests that come from retaining its own currency and relating to its special position in European and global finance.
In its deepest and most long-term elements, Europe’s economic challenge today concerns fiscal policy and debt more than oversight of financial markets. Improved regulatory instruments and practices are desirable, but the reason why oversight and a capacity for correction action is necessary is because banks and governments themselves are awash in debt. The UK confronts its own version of this challenge and is making important progress to reduce spending, control debt, and so reinvigorate growth. As we make the hard choices necessary for a better economic future, it is even more important than in more prosperous times that the EU do nothing to risk that a return to growth. Pragmatic regulatory change and firm national commitments to mastering debt must be the order of the day.
III. Great Britain’s Proposal
The United Kingdom believes that the Council discussions on Banking Union must begin by recognizing a distinction, and indeed a strong separation, between two kinds of proposals advanced by the Presidency. The first group of proposals seeks to endow the Eurozone with a stronger regulatory framework for oversight and crisis support of banks. The United Kingdom welcomes these proposals, agreeing that the Eurozone needs better banking supervision, though they must include better arrangements to safeguard the interests of non-Eurozone EU members. The second group of proposals suggests new taxes—a VAT increase and a Financial Transaction Tax (FTT)—but offers no clear purpose for raising the EU’s tax burden at this time. The United Kingdom proposes to set aside the Presidency’s ill-considered VAT proposal and perceives important problems with the FTT idea as well. As Europe struggles to escape the deepest recession in living memory, facing painful but necessary cuts in spending to confront unsustainable debts, this is not the time to consider vaguely-justified tax increases that could lead financial firms to leave our continent.
The key addition to the Presidency’s proposals on banking union is to make clear that non-Eurozone member-states will be protected from policies that discriminate against their financial sectors, intentionally or unintentionally, and that decision-making processes allow them input and influence alongside discussions among Eurozone members.
The United Kingdom acknowledges that of the two proposed tax increases, the FTT notion at least has some rationale relating to recent financial challenges. The main purpose of such a tax, as originally developed by economist James Tobin, is not to raise revenue but to deter speculative financial transactions (though of course they also raise revenue). Whatever the merits of this policy in the abstract, it is difficult to implement in the EU setting without bringing more costs than benefits—and especially to the UK. If extended across all of the EU, an FTT will effectively be a tax paid disproportionately in Britain, since so much of European financial activity occurs there. The British contribution to EU coffers will thus rise, absolutely and relative to other countries. Moreover, such a tax could risk London’s place in global finance, encouraging at least some global firms to move to other world centers. If applied only in the Eurozone or a subset of Eurozone members, the FTT will have the same effects on the less robust financial sectors of the participating countries. The United Kingdom would counsel its EU partners not to pursue this option.