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And the Centre for Brexit Policy (CBP) think tank has said it was crucial for Brussels to offer the UK an acceptable deal for financial services after the end of the year, given much of the risk is currently mitigated by the City of London. The CBP report, authored by among others, Martin Howe QC, Barney Reynolds, of City law firm Shearman & Stirling, and DUP MP Sammy Wilson, looks at the issue as part of a wider consideration of the leverage at Britain’s disposal to achieve what a “sovereignty compliant exit from the transition period”.
It states: “In international affairs, the EU plays a legal shell game, switching between legal categories – the EU, the eurozone and individual member states.
“In law, the eurozone has been only partially constructed.
“The difficult bit, which involves member states assuming legal liability for each other’s debt, has not yet been completed.
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“Yet this is the bit that is legally vital for the zone to be truly a sovereign currency zone (which is what it purports to be).”
The risk occurs because the 19 member states which signed up for the eurozone have given up sovereignty over their currency, since it is issued by the European Central Bank (ECB), over which they have no individual control.
As a result, they cannot guarantee to print more money to repay their debts in a way that a sovereign nation with its own currency – for example the pound – could.
As a result eurozone is “essentially sub-sovereign and carries meaningful risk”, the report warns, with the system both undercapitalised and undercollaterised.
The authors warned: “On a conservative estimate, there is at least €1trillion missing from the system in terms of capital and collateral.”
The bottom line is what they termed a “massive unmanaged build-up of non-publicised financial risk in the eurozone” which “pollutes the rest of world due to the interconnectivities of the global financial system”.
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At present, the risk is managed in the UK but not in the EU, the report says.
It explains: “Eurozone risk is mitigated as it emerges into the global financial market through the UK’s global financial centre, thereby benefiting the US.
“Notably, the EU doesn’t do this – the European Banking Authority (EBA) (the pan-EU bank oversight authority) runs stress tests for eurozone (Single Supervisory Mechanism, SSM) banks that ignore the sub-sovereign issue and assume the eurozone is legally complete, with joint and several member backing.”
However, it warns: “Current arrangements for the UK’s mitigation of eurozone risk will change after Brexit since the EU passport falls away and EU law requires some financial business to be conducted onshore in the EU, under EU law and supervision.”
The EU could manage the risk by introducing joint and several liability of members for each other’s debt.
However, Germany, the bloc’s financial powerhouse, has indicated it is not willing to do this.
The report concludes: “There is a problem for the global financial market that needs to be managed after Brexit from outside the EU.
“The UK could continue to perform its current service of mitigating the risk for the world, since it is in the UK that the EU meets the global financial market.
“But in order to do so, the UK would need a reliable, predictable, Enhanced Equivalence arrangement for financial services, plus ancillary services (eg legal) and other matters (such as data protection recognition), and adequate ongoing provision of eurozone financial information, including from the EU itself, the ECB and eurozone financial institutions.”
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