By Eduardo Brunstein, General Manager, Standard Commerce Bank
Despite recent seismic changes, the European Union is decidedly not in danger of complete collapse.
However, it is unclear what the future of the EU will hold for its member states. The state of collective uncertainty has raised questions among citizens and experts alike.
Yogi Berra famously said “The future ain’t what it used to be”. Plans to build a collective of 30 countries with just one border and one currency, without internal trade tariffs and in which everyone is employed, mobile and happy are no longer feasible. Recent developments changed visions of the EU’s future dramatically.
The fact of the matter is no one could possibly be 100% certain of the future of the EU, as it is currently quite fluid.
There are, however, reliable experts with well-informed insights on the macro trends that are shaping the Union as it moves forward.
As we all know, the dramatic upset in the European Union’s structure is Brexit, the United Kingdom’s exit from several -but not all -of the EU’s agreements.
The UK voted on the formal exit in June 2016. It is programmed to execute at 11pm UK time on Friday 29 March 2019. According to the BBC, “The UK and EU have provisionally agreed on the three “divorce” issues: of how much the UK owes the EU, what happens to the Northern Ireland border and what happens to UK citizens living elsewhere in the EU and EU citizens living in the UK”.
Britain’s exit fee will be steep: Investopedia estimates that the UK may owe the EU up to 100 billion Euros. The economic outlook is now rather bleak, to say the least. Bankers are already fleeing in droves, courted by Dublin and Frankfurt, even Paris; traditional finance is suffering, as well as up and coming Fintech companies.
Shortly after the vote, Uri Friedman made a compelling case in The Atlantic that the decision process itself was badly engineered from the start. He pointed out that (a) having a one-step process to decide such an important issue is wrong; (b) Britain, being a parliamentary democracy should at least give some weight to Parliament’s opinion, and (c) that perhaps the people weren’t at all prepared to take a stance on the issue.
Friedman’s claims are evident, growing numbers of British citizens and politicians alike are calling for a referendum vote.
Before dissecting the potential referendum vote, it’s important to understand why British citizens voted out. Some of the reasons that led the UK to leave are leading other nations to rethink their stance on the Union as well. The graph below shows the results of a poll taken by the BBC among those who voted “yes” on Brexit.
Reasoning behind the vote was somewhat divided and arguably a bit ill-informed. The given reasons are issues that could have been managed, controlled, or negotiated within the realm of the EU without an abrupt exit.
Immigration control was the most popular priority among voters and taking law-making control away from the EU took a close second. The age-old complaint that the UK contributes a disproportionate amount of financial assistance to the EU is ever present. The least popular reason was, at best, a childish attempt to send a message to politicians. None of these issues are new,all have com up occasionally in public policy debates over the years, but they’ve never been demonstrated -even collectively – to justify such a radical move.
Despite the looming doubt and a degree of voter’s remorse, citizens in other parts of Europe share the concerns that led British citizens to vote “yes” on Brexit.
Consequently 9 different countries,not including the UK, are considering (in various degrees) leaving the European Union. A poll done by the Washington Post revealed this wave of discontentment:
In all but 1 of the countries listed, the majority of those polled believe that some lawmaking capabilities should be restored to individual countries’ governments, rather than the EU. Even in Poland, the proportion of the populace that believes the current division of power should remain only outnumbers those who want to seize power back from the Union by 1%.
Concerns about the EU’s effect on member states are surprisingly consistent across borders,but perhaps the shock of Brexit will encourage other politicians across Europe to treat the decision of whether to remain in the Union a bit more delicately. If the issue is put to a popular vote, it should ideally be complemented by a parliamentary vote. Regardless, it may be wise to require atwo-thirds majority.
Another consequence of Brexit is that even though some believe that the EU should continue as it is and potentially get more involved in member states’ economies, the Union’s progress is undoubtedly slowing down. Some advocate a “multi-speed” approach to the EU in which new members are incorporated at a fast pace and older members can reevaluate their stance.
In a September 2017 interview with Financial Times, President Andrzej Duda of Poland warned that a multi-speed bloc would undermine the fundamental idea of the EU as a “union of equals” and ultimately lead to the collapse of the union. “If the EU formally becomes a union of different speeds it would in effect be formally divided into better and worse members and it would to a large extent lose its attractiveness for those countries that were deemed second class,” he said.
During a debate with the presidents of Georgia and Macedonia at an economic conference in southern Poland, President Duda argued that “thanks to our membership we have become a fully-fledged member of the political union of the west … If now we were going to go back and find ourselves in ‘category B’, for Poles that would mean a reduction in the attractiveness of the EU,” he said. “In addition the EU would become less attractive for those aspiring to join… It would mean one would have to go through many stages to get to the center where some countries stick together and think that they are better.” Macedonian President Gjorge Ivanov echoed Duda’s concerns and said that a two-speed Europe did not make sense “even as a metaphor”, pointing out that it was not possible for a train to move at two speeds simultaneously.
The below graph indicates the results of an ongoing poll The Economist published in March 2017:
In 5 of the 6 countries polled, public opinion of EU membership has diminished over time. The only country whose opinion has improved is Poland, which had more to gain from joining the Union than most.
In December 2017, The World Economic Forum (“WEF”) published a blog indicating that the same stance guides investors and analysts today, regarding the European Union’s future: “investors have recognized that Europe is doing well, they are putting their money where their mouth is -and they want to know what’s next for the Euro area”.
The WEF has also listed 5 challenges currently facing Europe. Successfully managing these challenges will benefit the EU and, ultimately, the world economy as a whole:
- Moving toward a human-centered economy: “Europe can boost economic growth through digitization and automation, while also ensuring the benefits are shared equitably across society.”
- Management of immigration and borders: “Europe’s next generation aspires to convert migration into the foundation of a strong society where migrants and their integration are regarded as drivers of economic prosperity and a flourishing and dynamic cultural lifestyle”.
- Leading global sustainability: “European governments, businesses, and citizens have recognized that that economic growth and sustainable energy policy can go hand-in-hand. Unaddressed climate change would increase global instability with a direct impact on some parts of Europe, while increasing geopolitical uncertainty that may limit European access to energy and resources. European citizens, especially young people, want a stronger action agenda to address climate change.”
- Dealing with threats to public safety: “With increasing collaboration or integration in defense and security among countries, Europe is well positioned to take on a greater global role in security and defense and there is a currently a strong effort underway to strengthen Europe wide collaboration on defense and security and ideas such as the establishment of a “European DARPA” can help in that direction.”
- Working to be relevant, responsive, and trustworthy: “Europe can benefit from the Fourth Industrial Revolution if we ensure the technological advancements are used to help public sector institutions more effectively deliver services and identify citizen needs. We need to recognize the different needs of countries while also ensuring mutual benefits and progress for all members of this union.”
Soon after sharing these challenges, the WEF also published the following 5 crucial elements they believe will pave the way for a stronger European Union:
1) Complete the Banking Union by supporting the Single Resolution Fund (SRF) –this is a fund designed to reinin problematic banking practices. Having a fund like the European Stability Mechanism backing it would prepare the fund for any eventuality, thus enhancing confidence in the markets as a whole.
2) Establish common deposit insurance for the Banking Union: There are currently 19 different potential plans to protect depositors. If the EU can come up with just one comprehensive scheme, it will be a great leap.
3) Europe needs to further harmonize its financial markets to simplify investments between countries:“…at the moment, bankruptcy laws, for instance, vary massively between European countries. The same differences exist in corporate law, and in tax law. If it took less time to figure out the laws in the country you wanted to invest in, it would open up investments abroad, helping venture capital and the private equity market. That’s good news for companies, who would have a new financing channel. Pushing the Capital Markets Union in Europe forward is, therefore, a must.”
4) A limited fiscal facility: a stabilizing fund or entity that will absorb potential future economic emergencies, funded gradually through member states. This doesn’t mean more centralization –a higher concentration of resources could be achieved by re-routing some of the EU’s existing funding.
5) Establish a European Monetary Fund: the International Monetary Fund (IMF)has recently scaled back its involvement in Europe. It also has its own conditions attached to each accord (recent examples include Portugal, Greece and Spain) which often don’t coincide with the interests of the EU, its methods or even its long-term vision. As a result, the EU needs its own monetary fund to fill the void left by the IMF.
The European Union’s future is complex and subject to numerous factors. Worldwide, experts and politicians are heatedly debating the possibilities, as the eventual outcome will affect the entire world, not just EU member states.
The European Union’s current leadership role will probably only increase in relevance and depth, largely because its attempt to lead by example is somehow lost on other nations, thus creating a trust or moral discrepancy. While other nations are entrenching themselves in endless debates about minutia, Europe is regaining its role as the torch bearer of individual rights, humanism and careful planning for the future.
However imperfect, however limited the EU’s future will be, leaders cannot simply wait to see what the it will hold without getting involved. Europe is doing just that, and the rest of the world should follow suit.
UK seeks G7 consensus on digital competition after Facebook blackout
LONDON (Reuters) – Britain is seeking to build a consensus among G7 nations on how to stop large technology companies exploiting their dominance, warning that there can be no repeat of Facebook’s one-week media blackout in Australia.
Facebook’s row with the Australian government over payment for local news, although now resolved, has increased international focus on the power wielded by tech corporations.
“We will hold these companies to account and bridge the gap between what they say they do and what happens in practice,” Britain’s digital minister Oliver Dowden said on Friday.
“We will prevent these firms from exploiting their dominance to the detriment of people and the businesses that rely on them.”
Dowden said recent events had strengthened his view that digital markets did not currently function properly.
He spoke after a meeting with Facebook’s Vice-President for Global Affairs, Nick Clegg, a former British deputy prime minister.
“I put these concerns to Facebook and set out our interest in levelling the playing field to enable proper commercial relationships to be formed. We must avoid such nuclear options being taken again,” Dowden said in a statement.
Facebook said in a statement that the call had been constructive, and that it had already struck commercial deals with most major publishers in Britain.
“Nick strongly agreed with the Secretary of Stateâ€™s (Dowden’s) assertion that the governmentâ€™s general preference is for companies to enter freely into proper commercial relationships with each other,” a Facebook spokesman said.
Britain will host a meeting of G7 leaders in June.
It is seeking to build consensus there for coordinated action toward “promoting competitive, innovative digital markets while protecting the free speech and journalism that underpin our democracy and precious liberties,” Dowden said.
The G7 comprises the United States, Japan, Britain, Germany, France, Italy and Canada, but Australia has also been invited.
Britain is working on a new competition regime aimed at giving consumers more control over their data, and introducing legislation that could regulate social media platforms to prevent the spread of illegal or extremist content and bullying.
(Reporting by William James; Editing by Gareth Jones and John Stonestreet)
Britain to offer fast-track visas to bolster fintechs after Brexit
By Huw Jones
LONDON (Reuters) – Britain said on Friday it would offer a fast-track visa scheme for jobs at high-growth companies after a government-backed review warned that financial technology firms will struggle with Brexit and tougher competition for global talent.
Finance minister Rishi Sunak said that now Britain has left the European Union, it wants to make sure its immigration system helps businesses attract the best hires.
“This new fast-track scale-up stream will make it easier for fintech firms to recruit innovators and job creators, who will help them grow,” Sunak said in a statement.
Over 40% of fintech staff in Britain come from overseas, and the new visa scheme, open to migrants with job offers at high-growth firms that are scaling up, will start in March 2022.
Brexit cut fintechs’ access to the EU single market and made it far harder to employ staff from the bloc, leaving Britain less attractive for the industry.
The review published on Friday and headed by Ron Kalifa, former CEO of payments fintech Worldpay, set out a “strategy and delivery model” that also includes a new 1 billion pound ($1.39 billion) start-up fund.
“It’s about underpinning financial services and our place in the world, and bringing innovation into mainstream banking,” Kalifa told Reuters.
Britain has a 10% share of the global fintech market, generating 11 billion pounds ($15.6 billion) in revenue.
The review said Brexit, heavy investment in fintech by Australia, Canada and Singapore, and the need to be nimbler as COVID-19 accelerates digitalisation of finance, all mean the sector’s future in Britain is not assured.
It also recommends more flexible listing rules for fintechs to catch up with New York.
“We recognise the need to make the UK attractive a more attractive location for IPOs,” said Britain’s financial services minister John Glen, adding that a separate review on listings rules would be published shortly.
“Those findings, along with Ron’s report today, should provide an excellent evidence base for further reform.”
Britain pioneered “sandboxes” to allow fintechs to test products on real consumers under supervision, and the review says regulators should move to the next stage and set up “scale-boxes” to help fintechs navigate red tape to grow.
“It’s a question of knowing who to call when there’s a problem,” said Kay Swinburne, vice chair of financial services at consultants KPMG and a contributor to the review.
A UK fintech wanting to serve EU clients would have to open a hub in the bloc, an expensive undertaking for a start-up.
“Leaving the EU and access to the single market going away is a big deal, so the UK has to do something significant to make fintechs stay here,” Swinburne said.
The review seeks to join the dots on fintech policy across government departments and regulators, and marshal private sector efforts under a new Centre for Finance, Innovation and Technology (CFIT).
“There is no framework but bits of individual policies, and nowhere does it come together,” said Rachel Kent, a lawyer at Hogan Lovells and contributor to the review.
($1 = 0.7064 pounds)
(Reporting by Huw Jones; editing by Jane Merriman and John Stonestreet)
G20 to show united front on support for global economic recovery, cash for IMF
By Michael Nienaber and Andrea Shalal
BERLIN/WASHINGTON/ROME (Reuters) – The world’s financial leaders are expected on Friday to agree to continue supportive measures for the global economy and look to boost the International Monetary Fund’s resources so it can help poorer countries fight off the effects of the pandemic.
Finance ministers and central bank governors of the world’s top 20 economies, called the G20, held a video-conference on Friday. The global response to the economic havoc wreaked by the coronavirus was at top of the agenda.
In the first comments by a participating policymaker, the European Union’s economics commissioner Paolo Gentiloni said the meeting had been “good”, with consensus on the need for a common effort on global COVID vaccinations.
“Avoid premature withdrawal of supportive fiscal policy” and “progress towards agreement on digital and minimal taxation” he said in a Tweet, signalling other areas of apparent accord.
A news conference by Italy, which holds the annual G20 presidency, is scheduled for 17.15 (1615 GMT)
The meeting comes as the United States is readying $1.9 trillion in fiscal stimulus and the European Union has already put together more than 3 trillion euros ($3.63 trillion) to keep its economies going despite COVID-19 lockdowns.
But despite the large sums, problems with the global rollout of vaccines and the emergence of new variants of the coronavirus mean the future of the recovery remains uncertain.
German Finance Minister Olaf Scholz warned earlier on Friday that recovery was taking longer than expected and it was too early to roll back support.
“Contrary to what had been hoped for, we cannot speak of a full recovery yet. For us in the G20 talks, the central task remains to lead our countries through the severe crisis,” Scholz told reporters ahead of the virtual meeting.
“We must not scale back the support programmes too early and too quickly. That’s what I’m also going to campaign for among my G20 colleagues today,” he said.
Hopes for constructive discussions at the meeting are high among G20 countries because it is the first since Joe Biden, who vowed to rebuild cooperation in international bodies, became U.S. president.
While the IMF sees the U.S. economy returning to pre-crisis levels at the end of this year, it may take Europe until the middle of 2022 to reach that point.
The recovery is fragile elsewhere too – factory activity in China grew at the slowest pace in five months in January, hit by a wave of domestic coronavirus infections, and in Japan fourth quarter growth slowed from the previous quarter with new lockdowns clouding the outlook.
“The initially hoped-for V-shaped recovery is now increasingly looking rather more like a long U-shaped recovery. That is why the stabilization measures in almost all G20 states have to be maintained in order to continue supporting the economy,” a G20 official said.
But while the richest economies can afford to stimulate an economic recovery by borrowing more on the market, poorer ones would benefit from being able to tap credit lines from the IMF — the global lender of last resort.
To give itself more firepower, the Fund proposed last year to increase its war chest by $500 billion in the IMF’s own currency called the Special Drawing Rights (SDR), but the idea was blocked by then U.S. President Donald Trump.
Scholz said the change of administration in Washington on Jan. 20 improved the prospects for more IMF resources. He pointed to a letter sent by U.S. Treasury Secretary Janet Yellen to G20 colleagues on Thursday, which he described as a positive sign also for efforts to reform global tax rules.
Civil society groups, religious leaders and some Democratic lawmakers in the U.S. Congress have called for a much larger allocation of IMF resources, of $3 trillion, but sources familiar with the matter said they viewed such a large move as unlikely for now.
The G20 may also agree to extend a suspension of debt servicing for poorest countries by another six months.
($1 = 0.8254 euros)
(Reporting by Michael Nienaber in Berlin, Jan Strupczewski in Brussels and Gavin Jones in Rome; Andrea Shalal and David Lawder in Washington; Editing by Daniel Wallis, Susan Fenton and Crispian Balmer)
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