Managing Euro Risk

Abstract

Many people can now see that the EU project has lost touch with the normal arrangements that govern successful western economies. But less obvious is that the EU’s financial system and its legal underpinnings are weak. As this analysis shows, EU law sidesteps the Basel standards – the international rules which protect the financial system from systemic risk. But, whereas the UK has until now helped to manage the risk by applying its own controls to the business it regulates, after Brexit much will depend on whose laws govern trade. Managing Euro Risk explains how the problem has arisen. Legally, the Eurozone has circumvented the Basel rules. Eurozone states can raise funds on the debt markets, behaving as sovereign, but in fact are ‘sub sovereign’ ‒ and without the currency being backed by a single sovereign. The EU’s supra-national bodies, its central bank (the ECB) and investment bank (the EIB) operate under the same misassumptions. The problems have been exacerbated by an absence of transparent accounting practices. The upshot is that the Eurozone’s financial sector today is under-capitalised, under-collateralised and less liquid than it should be. The authors, Barnabas Reynolds, a UK and international financial services lawyer, David Blake, an academic economist and Robert Lyddon, a bank accounting and financial analyst, warn that the potential for systemic risk spreading to the UK or globally is grave, endangering businesses, savers and investors - a danger likely to become acute after Brexit. The authors explain how the risk can be managed and contagion contained. They propose that the EU should be obliged to apply the Basel and accounting standards properly, with Eurozone member states adopting joint-and-several liability for each other's debts. Above all, the UK should insist that future financial services trade with the bloc will be on an Enhanced Equivalence basis, with UK trade governed by UK law. If the EU refuses, the UK and US, the regulators of the global financial market, must take whatever steps are needed to prevent systemic risk.