Subtraction by subtraction? Brexit and its impact on the common European financial space

How is Brexit likely to affect efforts to complete the European single market for capital and financial services? Brexit will shrink European capital markets by roughly 25 percent, with even larger declines in equity markets and pension funds. Approximately half of all euro transactions into foreign exchange take place in London, as do more than 75 percent of derivatives trading and hedge fund activity. Losing such a large and influential member from the EU will undoubtedly complicate its financial reform efforts.

This chapter assesses the technical rationale behind two key European financial reforms – banking union and European Capital Markets Union (CMU), before identifying the priorities of three key players in shaping these reforms: the European Commission, United Kingdom, and Germany. Looking at these priorities through the lens of Dirk Schoenmaker’s (2011) financial trilemma, Brexit seems likely to mean that European financial markets will evolve more in line with German preferences. In practice, this means that banks will continue to play a leading role in European finance, with protective niches carved out for nationally sensitive financial actors. It means that the concern over moral hazard stemming from mutualized liabilities is likely to outweigh arguments calling for greater European solidarity.