Dear David, dear Didier,
Ladies and gentlemen,
It is good to be back at Eurofi!
We met many times during the financial crisis. I am sure nobody here is nostalgic about that period. No nostalgia, but no short memories either!
I am glad to speak to you during better economic times than the last time we met.
- Last year EU growth reached 2.4% – the highest percentage in a decade.
- The labour market continues to improve, with unemployment down to 7.5% in the EU.
- Public finances are improving.
- And investment is recovering, supported by strong demand and good financing conditions.
At the same time, the EU faces challenges:
- Unemployment remains high in some parts of the EU, and the increase in wages remains limited.
- Even if it is improving, investment remains too low.
- As a result, core inflation is subdued.
- The EU could also be impacted by global risks, such as:
o A tightening of financial conditions in the medium term;
o Geopolitical tensions and a shift towards protectionism globally.
- And of course, Brexit is also one of the various challenges that we face.
Brexit is a lose-lose situation. I do not see add value in Brexit and so far, nobody has shown us any.
- Outside of the Customs Union and the Single Market, there can be no frictionless trade.
- Businesses will be faced with non-tariff barriers and border checks that do not exist today.
- For many economic sectors, this will have an impact on value chains, which are currently closely integrated.
- This will impact in particular manufacturing and logistics, as well as the agricultural and food sectors.
- The situation would be made worse in a “no deal” scenario, which would result in the return of tariffs, under WTO rules.
So, Brexit will come at a cost.
And this cost will be substantially higher for the UK than for the EU. Let me make 4 points:
- Trade dependency is far higher on the UK side. The EU27 accounts for around 50% of UK export and imports. The UK market represents around 7% of EU exports and 4% of imports. Some EU regions are of course more exposed to the UK than others. We will be very attentive regarding this impact.
- The UK attracts Foreign Direct Investment to serve broader EU markets. With unavoidable friction and non-tariff barriers, some companies will need to rethink their business models.
- EU talent may find the UK to be a less attractive place. This could generate skills shortages, for instance in the health sector.
- Finally, the UK is currently covered by 750 international agreements as an EU Member State. After Brexit, the UK will have to negotiate its own agreements – not only in trade – but also, for instance, in aviation. The UK will need a new administrative capacity.
But we, in the EU, will also need to face the consequences of Brexit.
We need to accelerate reforms that are ongoing to build a stronger Euro Area and a stronger Single Market.
- We must boost confidence in the Eurozone by completing the Economic and Monetary Union,
o For instance, by transforming the European Stability Mechanism into a European Monetary Fund;
o And with a stabilisation tool to help Member States with large asymmetric shocks, which cannot be managed at national level alone.
- We must complete the Banking Union, in particular with a common backstop for resolution, measures to tackle the issue of non-performing loans and a European Deposit Insurance Scheme.
- And we must continue building a Capital Markets Union at 27 to open up markets, give EU businesses better access to finance and provide more investment opportunities for savers. For the CMU, new technologies and digitalisation are of key importance, as is shown by Valdis Dombrovskis' FinTech Action Plan. And I would like to also salute the work of Mariya Gabriel, the Bulgarian Commissioner who, in a dynamic manner, steers the work of the Commission on the Digital Single Market.
All these reforms, on which Valdis will give you more insight in a few moments, were decided before Brexit. But Brexit makes implementing them even more urgent.
Indeed, the UK decision will fragment a market that we have integrated step-by-step at 28. That integration must continue at 27.
Ladies and gentlemen,
The EU is ready to handle the costs caused by the UK's decision to leave.
- Some argue that the EU desperately needs the City of London, and that access to financing for EU27 business would be hampered – and economic growth undermined – without giving UK operators the same market access as today.
- This is not what we hear from market participants, and it is not the analysis that we have made ourselves.
- The ECB states clearly in its Financial Stability Review of last November that: "the risk that access to wholesale and retail financial services would be materially restricted for the euro area economy appears limited."
On the UK side, Prime Minister Theresa May has clarified that the UK is not looking for passporting. It is positive that there is now more recognition of the cost of Brexit for the UK.
But the Prime Minister also asked for mechanisms to continue the exchange of services in each other's markets, "based on the UK and EU maintaining the same regulatory outcomes over time".
I can perfectly see the UK's logic and interest in pleading for a system of “mutual recognition” and “reciprocal regulatory equivalence”. This is, indeed, what the Single Market achieves!
"Everything must change so that everything can stay the same", to paraphrase Lampedusa. But this will not work.
The UK has decided to withdraw from the Union. It wants to be sovereign and be able to set its own rulebook, to have its own supervision and enforcement system.
In doing so, the UK will move away from EU rules. It will not accept common EU supervision and enforcement tools. These are precisely the essential building blocks of our post-crisis financial regulation. They ensure that the internal market can exist and function correctly.
The EU understands that the UK does not want to become a 'rule-taker'.
But the UK also needs to understand that the EU cannot accept mutual market access without the common safeguards that underpin it.
This is needed to maintain financial stability, investor protection, market integrity and a level playing field.
This objective would not be reached if financial institutions could operate in the EU, or serve clients in the EU, based on an authorisation by the supervisors of a third country, subject to the rules, supervision and enforcement mechanisms of this third country alone.
This is not something that any country in the world would accept. That said, the EU is and will remain the most open market in the world. As Valdis Dombrovskis said in the City of London on Tuesday, no other jurisdiction operates a framework that is more open, comprehensive and rule-based for third countries.
And the EU intends to keep the Single Market open with third countries, in general, including the UK.
- In the EU, free movement of capital is open for third countries.
- As regards market access to provide services, the European Council made clear that our future FTA with the UK should include the right of establishment, with EU rules applying.
- And where allowed by our legislation, the EU will be able to declare some of the UK's rules and supervisory systems as equivalent.
On the future of equivalence, ladies and gentlemen, I want to make three points.
1) First, there is no intention of discriminating against the UK, post-Brexit.
In financial services, as in other sectors, there is no intention of punishment or revenge.
The world of finance is global and interdependent. We have a mutual interest in working together, not separately.
To date, the EU has adopted more than 200 equivalence decisions covering more than 30 non-member countries.
And we are improving the equivalence process. We have made new proposals with EMIR step 2 and the Investment Firm Review, and we started the process of improving equivalence with the ESAs Review.
Why would the equivalence system, which works well for the US industry, not work for the City?
2) Secondly, the equivalence system will operate in a more effective manner if the UK decides not to diverge from our financial regulation.
Let's not have a short memory! We all saw during the crisis that the risks of financial instability were ultimately borne by taxpayers – not only in the UK.
We saw for instance that remuneration of bankers set the wrong incentives and allowed excessive risk-taking.
And since the financial crisis evolved into an economic and social crisis, the consequences were indeed borne by society, from the young unemployed to the owners of small businesses. And I am not even mentioning the political consequences: nobody should underestimate these!
In order to limit the risks in the future, we collectively developed, together with the G20, more effective financial regulation and supervision. And we were very happy to do this hand-in-hand with the UK.
We need to keep this joint regulatory effort in mind, and be ready to exchange our ideas for future rules in the context of a close and voluntary regulatory cooperation.
3) Thirdly, the 21-month transition period that we have proposed could be useful to prepare for the new relationship.
That transition will also allow the EU to consider the adoption of equivalence decisions.
However, certainty about this transition period will only come once the whole Withdrawal Agreement has been agreed and ratified.
In the meantime, both market participants and public authorities should hope for the best, but prepare for the worst.
In other words, for as long as the ratification has not taken place, we need to be ready in case of a "no deal, no transition" scenario. This is our collective responsibility.
We have made good progress in the last 6 months, but we are not there yet. There is difficult work ahead before the June European Council.
This means that market participants and public authorities must continue to prepare for all scenarios. No one should underestimate the risk of disagreement.
Ladies and gentlemen,
The EU is ready to engage in close cooperation with the UK and consider equivalence decisions, where needed. Since he is going to speak in a moment, I want to publicly thank Valdis Dombrovskis, as well as DG FISMA, for their excellent cooperation on Brexit issues.
But the UK, which has acknowledged that its current red lines mean losing the financial passport, must also acknowledge that it cannot have the benefits of such passports.
And market participants should realise that this will not be business as usual.
In order to accompany that process, the European Commission has issued notices on asset management, credit-rating agencies, markets in financial instruments, insurance and reinsurance, banking and payment services, statutory audit and post-trade financial services.
We hope that these notices will be helpful. All market participants, big and small, will have to adapt to the new reality.
I know how mobile and dynamic the financial industry is. I trust its capacity to adapt to new times and to continue their contribution to the development of the Capital Markets Union and EU's Single Market in financial services.
We should look at the future not with fear of the unknown but with confidence in well-regulated and supervised markets.
- Europe will continue to be an open and attractive place to do business.
- London will continue to be a global financial centre.
- A significant level of financial relationship will remain, properly managed and supervised.
- Firms will adjust their business models to the new reality.
- And public authorities will ensure that risks to financial stability are properly supervised and that rules are enforced.
Thank you for your attention.
 ECB Financial Stability Review, November 2017, page 25. https://www.ecb.europa.eu/pub/pdf/other/ecb.financialstabilityreview201711.en.pdf?7a775eed7ede9aee35acd83d2052a198