The Irrelevance of Brexit for the European Financial Market

Abstract

Among participants in the global financial market, Brexit is commonly painted as an almost apocalypse-like scenario. The threat of a British exit from the European Union (EU) arguably involves a significant disruption to financial integration in Europe, which will threaten the pre-eminence of London as a global financial centre, and impose significant costs on all market participants. This paper takes a different position on the significance of Brexit for the European financial market. It argues that, in reality, the impact of Brexit for financial services will be minuscule, if not irrelevant. Such optimism is grounded in the economic stakes for both sides, the United Kingdom (UK) and the remaining EU countries (EU27), in retaining the benefits of access to the European Single Market for financial services. Given the joint economic interests, a likely outcome of the Brexit negotiations will be a solution that formally satisfies the 2016 referendum result, but in substance keeps Britain closely involved in the EU financial market. Alternatively, one should expect an agreement on the basis of regulatory equivalence. If an agreement is not achieved, private solutions by market actors are likely. The paper borrows from past examples in EU financial market integration that saw ingenious creativity at work in facilitating a desired outcome within the existing convoluted legal framework. These past experiences lead to the prediction of a similar approach being used for accommodating Brexit. The broader point is then that the EU financial services framework repeatedly sees a victory of politics or economics over the law—that is, formal legal problems or structures are brushed aside when political necessities or economic exigencies so require.