EU Brexit negotiators have set out a tough line on financial services, ruling out an ambitious trade deal for the lucrative sector and arguing that Europe would benefit from a smaller City of London, according to confidential discussions among the other 27 EU member states, reports the Financial Times.
In a rebuff to the UK, which is seeking to put financial services at the heart of a trade deal with the bloc, an internal EU27 meeting this week concluded that future arrangements should be based on “equivalence” — the limited and revocable access given to third-country institutions — rather than a wide-ranging new pact.
At present, such provisions give financial groups from countries such as the US conditional access to the single market for some services.
“There was a strong commission message that there would be no special deal,” said an EU diplomat briefed on the discussions — a first attempt to thrash out the bloc’s position on the issue before negotiations with Britain start in March. “The UK is being told from the beginning what the situation is.”
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Another EU diplomat said: “They are out of the internal market, that’s it. There can only be a much less ambitious agreement.”
Ensuring that financial services are not badly hit by Brexit is a top priority for the UK, since the sector is Britain’s biggest source of exports and tax revenue.
Theresa May’s government has also argued that if the City were damaged it would adversely affect financial stability and EU groups’ cost of financing, while contributing to the fragmentation of the sector.
But participants said that in the EU27 meeting the European Commission played down the risks of cutting off the City to EU businesses, saying that the financial sector was mobile enough to adapt.
They added that the commission maintained that a smaller City could benefit financial stability and the development of capital markets in the EU27, an argument that Spain also vocally supported.
The discussion focused on future relations after a transition period that Brussels intends to end by December 31 2020.
The commission negotiator also told the meeting that giving the City extensive market access could leave the EU more vulnerable in a crisis.
Brussels’ fear is that, in a financial emergency, UK regulators would prioritise continuity in companies’ UK operations over their activities in the EU27. This could lead to outflows of capital and liquidity or the withdrawal of vital services at a critical moment.
One senior diplomat said that the commission had underlined the importance of making sure that the EU did not lose “influence” over the UK financial sector, which could “have such a huge impact on the EU”.
While no country contradicted the approach of the commission, which is conducting the negotiations with the UK, the discussion highlighted differences between member states.