Financial Markets (Dis)Integration in a Post-Brexit EU

Towards a More Resilient Financial System in Europe

Dieter Pesendorfer

• Publisher: Palgrave Macmillan
• Year: 2020
• Print ISBN:
  9783030360511
• eBook ISBN:
  9783030360528
• Topic: Politics & International Relations
• Subtopic: Finance
• Index: Politics & International Relations

The European Union is creating a Financial Union with a European Banking Union and a Capital Markets Union in reaction to lessons learned from incomplete financial markets integration, the Global Financial Crisis and European Sovereign Debt Crisis. This book critically analyses these projects for a more integrated, resilient and sustainable financial system at a time when the United Kingdom as the member state with the most developed capital markets and the leading global and European financial center, the City of London, is leaving the Union. Neoliberal financial globalization and markets integration policies have led to finance-led capitalism that caused the crises. By building on pre-crises integration ideas, the Union revives and expands the reach of capital markets-based financing and shadow banking. The book discusses the consequences of deeper integration and the future of European financial centers advocating an alternative financial markets integration based on theories explaining finacialization and finance-led capitalism.

© The Author(s) 2020

D. PesendorferFinancial Markets (Dis)Integration in a Post-Brexit EUhttps://doi.org/10.1007/978-3-030-36052-8_1

Begin Abstract

1. Introduction

Dieter Pesendorfer¹

(1)

School of Law, Queen’s University Belfast, Belfast, UK

Dieter Pesendorfer

Email: [email protected]

‘The question today is whether financial systems are safer. The short answer is that they are safer, but not safe enough.

Above all, we must be concerned about increasing efforts to roll back some post-crisis regulations. Countries need to resist the pressures. Indeed they need to push on because more work and political will is required to fully implement the existing reforms.’

Christine Lagarde (2019: 9)

Keywords

European disintegrationEuropean financial markets integrationFinancial globalizationFinancial integration theoryFinancial instability

End Abstract

European economic and financial markets integration have become widely recognized as a success story as part of the broader European integration process that led to peace and prosperity between former imperialist rivals that had a history of repeated wars over European and global dominance. From the early years on closer cooperation and the pooling of resources have been seen by many admirers as leading to the most successful regional integration project in history and as unique model of capitalism in the wider global economy that has generated a relatively high level of social welfare and wellbeing, although with quite some variation within the different countries and regions. The World Bank praised Europe’s distinct ‘golden growth’ model as powerful ‘convergence machine’ that must meet the expectations of Europeans who want ‘economic growth to be smarter, kinder, and cleaner’ (Gill et al. 2012). Deeper integration promised not just peace, more efficiency, wealth and social cohesion but also regaining economic and political power that had been lost by the nation states in an increasingly globalized world economy controlled by great powers, transnational corporations, and financial markets. Despite numerous shortcomings, problems, and failures to deliver on specific targets over the decades, European integration created sufficient attractiveness for the majority of European countries to join the original six member states of the European Economic Community (EEC) or to get at least in close relationship with these core countries and the European Union (EU) emerged after further enlargement rounds as a powerful economic bloc of 28 member states that are part of an economic union and 19 of those member states share a common currency with the euro which has become the world’s second most important currency immediately after it was introduced 20 years ago. The European Single Market that guarantees the ‘four freedoms’ of free movement of goods, capital, services, and labor, all central to deeper economic, financial and capital markets integration, has established an even greater economic bloc with significantly reduced internal borders and regulatory obstacles, constituting with over 500 million consumers one of the largest markets in the world economy. With an extended membership, although with some important exemptions for the non-EU members, the Single Market consists of all 28 EU member states and Norway, Iceland, and Lichtenstein which are all members of the European Economic Area (EEA). Additionally, Switzerland is partially integrated on the basis of a Free Trade Agreement of 1972, several sectoral trade agreements signed in 1999 and 2004 and an additional 100+ bilateral agreements, which requires the country to take over relevant EU legislation in the covered sectors. The creation of the Single Market in 1992 and the currency union in 1999 were not just seen as major boosts for economic and financial markets integration but because of their design features also as deeply conflicted, neoliberal, market fundamentalist strategies that have amplified the power of large corporations and finance and forced member states, no longer able to control their own currencies with national monetary policy, to adopt fiscal discipline and deregulatory and market-friendly policies that would increase financial stability and Europe’s competitiveness in the global economy. Financial markets integration in Europe as well as economic and monetary integration and the Single Market were still incomplete, not least because of the different country groups within the core and periphery of integration creating fragmentation and different levels of integration; service sectors generally lagged behind the integration of trade in goods and only some financial markets and their regulatory governance were truly European, others remained split along national borders creating competitive pressures in global as well as European competition while also some protection within the European market. Contrary to the promises by its supporters, financial integration did not create more stability but more instability. Lack of social and economic cohesion resulting from the economic and monetary system undermined stability by reproducing macroeconomic imbalances and was insufficiently addressed by policymakers guided by the premise that the EU should never become a transfer union, in which wealth is redistributed from richer to poorer member states and regions to significantly reduce social and economic disparities. Transformations in capitalism and its financial system led to rising inequality and problematic developments in the ‘real economy’ of non-financial firms, while the aging society put additional pressure on the national welfare systems. When the Global Financial Crisis (GFC) of 2007–2009 put the European markets and political systems under extreme stress and the following multi-year European sovereign debt crisis starting in 2009 created an unprecedented existential crisis for the EU and European integration, fundamental flaws and problems in the design and operation of EU economic, monetary, and financial governance and systems were exposed. The Eurozone became widely seen as not delivering ‘shared prosperity’; instead it turned into an area ‘highly vulnerable to political and economic shocks’. Martin Wolf (2016) came to a widely shared, deeply unfavourable conclusion: ‘The painful truth is that the eurozone has not only suffered poor overall performance, but has also proved to be a machine for generating economic divergence among members rather than convergence.’ Social peace broke in several member states, and desperate people turned to violence after finance had shown its own face of violence towards society. Finance-led capitalism had brought European integration to the brink of collapse with economic turmoil unseen since the Great Depression, some markets disintegrating, and European societies still adopting to the social and economic fallout a decade after the start of the crisis. The dramatic and destabilizing events in Europe led to reflexive calls for more integration but also to concerns whether integration went too far and is now on a path towards hyper-integration (Majone 2014). For critics of neoliberal financial globalization and neoliberal European integration these crises were no surprise but more a matter of time when they would occur as radical reform proposals for an alternative (financial) globalization and European integration from the pre-crisis decades were ignored. A Eurozone crisis and the disintegrative tendencies this could create was even predicted by neoliberal scholars that saw significant flaws in the Eurozone design (see Chap. 3). However, the EU, the Eurozone countries, and the euro as a global reserve currency survived thanks to costly emergency actions, economic recovery and unprecedented unconventional monetary measures, and wide-ranging reforms of financial regulation. In the eyes of supporters of European integration, surviving such a major crisis of a century is clear proof of the resilience of the EU that remained much more stable over the crisis years than several of the member states’ political systems. The EU moreover learned lessons and used the crisis as an opportunity to address some of the reasons for economic instability and launched new ambitious projects for ‘a deeper and fairer economic and monetary union’, with a more integrated Economic and Fiscal Union, more democratic accountability, and a ‘genuine Financial Union’ consisting of a European Banking Union (EBU) for the Eurozone member states but open to the others and a true Capital Markets Union (CMU) for all EU member states. These policies for deeper economic and financial integration and more risk-sharing across European economies also include an agenda for ‘sustainable finance’ and for more ‘inclusive growth’ and ‘financial inclusion’. Together they should make the European economic, monetary, and financial system more resilient to future stress and even sustainable, meaning not leaving the next generations worse off than the current at a time when the current generation is already seen as worse off than the previous (Bialik and Fry 2019; O’Connor 2018) and the EU is challenged by multiple crises originating from within and outside. Some have argued that financial integration policies have become a ‘general tool of statecraft’ which the EU has started to use to circumvent budgetary and other constraints and now uses finance and financial markets as ‘new strategies of governance’ (Braun et al. 2018: 104).

The GFC as a systemic crisis of ‘finance-dominated capitalism’ (Hein 2012) and financial globalization with liberalized financial markets led to numerous calls to see the crisis as opportunity to introduce long-overdue measures to ‘tame finance’ and to make future crises less severe and more manageable; yet the global and European reforms were more continuity than radical transformation and more piecemeal, reactive and insufficiently active interventions. Even regulators such as the governor of the Bank of England, Mark Carney (2015), criticized at least parts of them as ‘half measures’ that undermine economic recovery and financial stability and warned especially about most severe risks in the euro area. High levels of government debt in several member states and bad loans, low profitability, and other problems in the European banking sector are still seen as some of the most serious vulnerabilities in the post-GFC global financial markets (c.f. IMF 2019a). The International Monetary Fund (IMF 2019b) acknowledged for the euro area ‘some progress’ but concluded that ‘in many cases political consensus on the path forward is missing.’ According to the Director of the IMF’s European Department, Poul Thomsen (2019), the risks to stability in the euro area ‘remain serious’ and a ‘lack of reforms means that little progress has been made on closing productivity gaps across member states, leaving some countries with low potential growth rates and high unemployment’. The latest report on risks and vulnerabilities in the EU financial system by the European Supervisory Authorities (EIOPA et al. 2019) expected a rise in market volatility and less favourable macroeconomic environment that could increase various risks. The EU still has a limited risk sharing and economic stabilization capacity and the major new projects to finalize the incomplete Financial Union, EBU, and CMU promote deeper integration while also creating their own new risks that could undermine financial stability and create financial disintegration and severe turbulences.

The chance for a radical overhaul of the global economic system, its financial architecture, the European financial system and its governance and structure was missed. However, a decade after the GFC reforms are still unfinished and ongoing in an overall climate in which radical critics, leading scholars as well as key regulators and lawmakers call for a transformation of capitalism to save the system and for additional regulatory measures to transform finance. While radical critics demand nothing less than an ‘alternative (financial) globalization’ based on a fundamental overhaul of the global trading and financial system and even democratization of finance, leading regulators are nowadays calling for sustainable finance and inclusive capitalism and they are also more willing to look at the systemic implications of finance and to accept that the financial system is inherently instable and requires stricter regulation and supervision than in the decades before the GFC. Yet only a small number of regulators has questioned whether financial globalization has gone too far and what the ‘right size’ of the financial system would be and what that would mean for regulatory intervention. A good number of regulators and policymakers is already reassuring that the financial sector has become safe and resilient and that it would now even need deregulation and frameworks that support growth, a revival of markets that flourished before the crisis, and new financial innovation and engineering. This largely reflects the financial industry’s continued powerful position reflected also in the flaws of the dominant economic and finance theories. The crises did not strengthen the countervailing powers necessary for radical change; Occupy Wall Street, London, or Frankfurt were only temporarily able to mobilize larger protests and to raise public awareness about the operation and consequences of finance-led capitalism but had little influence on reform decisions. Neither older or newer non-governmental organizations (NGOs) and their transnational movements or leading critical scholars specialized in finance had much of an impact. The powerful financial industry might have lost some battles and is now at least temporarily facing new and stricter regulation, supervision and enforcement but overall the industry activities are still seen as mostly ‘appropriate’, while ‘the architects of reform are working around the edges’ (Wray 2013: 696). Financial integration and financial globalization policies faced a short period of intense public scrutiny and high expectations from the public to get the reforms right but policy- and lawmaking returned already to the usual elite circles that dominate the technical discussions in ‘quiet times’. Financial industry spent even larger amounts for lobbying than ...

Table of contents

• Cover
• Front Matter
• 1. Introduction
• 2. Financial (De)Globalization and Financial Market (Dis)Integration
• 3. Finance-Led Capitalism and Neoliberal Financial Market Integration in Europe
• 4. Brexit and Financial (Dis)Integration: Between Cakeism, Project Fear, and Reality
• 5. Finishing Capital Markets Union
• 6. Finishing the Banking Union
• 7. Conclusion: The Future of Financial Markets (Dis)Integration
• Back Matter