The consequences of Brexit

Since 2016 I have been writing on the potential consequences of Brexit. Before the referendum, the aim was to inform the public of the dangers ahead, were Leave to prevail. After the referendum, the aim is to steer policy away from a hard-Brexit.

After Theresa May confirmed she is after a Hard Brexit, I wrote an explanation of what this means for the City, and by consequence the country.

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The prospect of Brexit is already making every wage earner in Sterling poorer, as explained in my Marmitegate piece for The Conversation.

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While we knew of the potential effects of a Brexit vote on currencies, few people appreciate what a hard-Brexit (with no successor agreement) will mean for investment and trade. My article on opportunities for Eastern European investors in a hard-Brexit scenario should surprise many on the Leave side.

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My other published work on Brexit can be accessed via this link.

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The sheriff has left town: Trump and a return to the wild-west days of finance

My article on Trump and plans for financial deregulation posted in The Conversation can be accessed here

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The article has also appeared on Newsweek

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On Salon.com (access here)

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And on Economia (access here)

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I wrote a follow-on article, discussing expressly the chances of a return of Glass-Steagall for the Huffington Post. You can view it here.

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Why Hard Brexit is now impossible

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An unexpected thing happened today, the High Court in London passed judgment on a case involving the correct process of starting the British withdrawal from the European Union.

The court said that the government can only activate Article 50 (and thus start the 2 year countdown to exit) after Parliamentary approval.

What does this mean and what are the options Theresa May is faced with now?

The short of it is that the hard-Brexit trainwreck has been delayed, perhaps even postponed indefinitely. Why so?

In the current Parliament there is no majority for Brexit. This is both because the majority of MPs in the Commons stood for Remain, and because the Lords are likely to be strongly opposed to the idea.

Now, this does not mean that a majority of MPs cannot be found to vote in favour of activating Article 50. In the current circumstances, as the majority of constituencies in England voted in favour of Leave, it would be political suicide for most sitting MPs to vote against Article 50 activation.

An indication of how the Commons votes on Brexit issues is given by the failure of the proposal to protect the rights of EU citizens already resident in the UK recently. A narrow majority of MPs voted against common sense and decency. Why? Because they are afraid of their Leave voting constituents.

Is all this struggle in favour of Parliamentary involvement for nought then? Actually no. Saying that MPs will not want to openly defy the will of their constituents is not the same as saying that the majority of MPs will go along with May’s apparent desire for a hard Brexit.

From the point of view of an MP, suicide now (by voting against Brexit) against suicide after (once the consequences of a hard-Brexit begin to bite) is not a great choice. A better choice is to vote for Article 50 when given the chance, but with caveats that make participation in the Single Market a requirement for negotiations.

The logic behind this is that Brexit does in fact mean Brexit, but without meaning the utter destruction of the country’s economy. This is a sensible compromise between the public’s democratically expressed desire to commit suicide and the MPs desire for self-preservation.

This of course is relevant for the Commons. I am not investigating whether the regions will need to agree to activating Article 50, as it seems that they will not get a veto after the decision of the Belfast court. What the Lords will do is another question. The Lords do not need to (and do not) care what people think. They could block Brexit indefinitely, or force May’s hand.

Force May’s hand to do what you wonder? The answer is obvious. If the current Parliament cannot authorise a hard-Brexit and a hard-Brexit (translated as exit from the Single Market in order to achieve this fictional control over immigration) is what May wants, we need a new Parliament. We can get a new Parliament only by having an early General Election.

The chips are on the table for Mrs May. This court decision means that she buries any dreams of a hard Brexit, or she brings her hard edged dreams in the form of a party manifesto (for disaster) to the people and see what happens.

Now, the alternative avenue, appealing the court decision, is not a very clever move. The decision rests on an interpretation of Article 50 as the beginning of a process leading inevitably to irreversible loss of rights (everyone in this trial agreed this to be so). If May appeals the decision to the Supreme Court, then (as a matter of EU law interpretation) the nature of Article 50 (the crux of the matter in this case) will need to be investigated. The Supreme Court will have no choice but to refer the matter to the Court of Justice of the EU for an interpretation of Article 50. If the CJEU returns the opinion that Article 50 is irreversible, there is no basis for overturning the High Court decision. If it says it is reversible, then the decision will probably be reversed, but May will have opened an avenue for a different government (or political pressure) to stop Brexit within the two year period through another referendum, or executive decision.

You understand therefore that appealing is a lose-lose situation for May.

What is the outcome for the merry Brexit circus? Soft Brexit or an election.

What role can you play? 1- If you are against Brexit, or in any case not insane (and could live with a soft Brexit, if it cannot be avoided altogether), and 2- are lucky to be a resident of Richmond, then you could vote for the Liberal Democrats in the Richmond Park by-election on December 1st. This way you achieve two things with one vote. You ensure that another MP against Brexit joins this Parliament (need I remind you that golden boy Zac is a Brexit supporter?) plus, you send a message to May that a hard Brexit manifesto will not fare well in the ballot box.

I leave you with this thought. If May is ignorant enough to appeal this decision, how fun would it be to have the process of withdrawal from the EU become the subject of a CJEU decision?

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I fought the Law and the Law won, till now

This post first appeared on the new SLSA Blog, it is reproduced here in full:
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As the troubles of Deutsche Bank remind us of the heady days leading to the collapse of Lehman, we have a good opportunity to reflect on financial rescues and resistance to the austerity that resulted, at least in Europe. While on the systemic level resistance to bailouts, and rescues with their associated conditionality may sound counter-intuitive (if there had been no rescues our economies and lives would look very different now), there is significant impetus to resist on the personal level.
 
A pensioner who as suffered repeated reductions in payments due to financial consolidation mandated by rescue conditionality; a judge who has seen incomes slashed; employees made redundant; depositors bailed-in; investors subject to haircuts; and many more have strong personal incentives to resist. Add to these financial market players who object to QE and ECB “helicopter money” and you have a strong constituency for action, despite the fact that no one would have preferred policy makers to let the market ‘creatively destroy’ itself in a Europe-wide experiment in Schumpeter’s gale.
 
The obvious vehicle for resistance is the law. How can the law then be used to protect personal interests in a hope to reverse austerity, or at least protest in individual cases?
 
The first question to ask is what to complain about?
Rescue programmes, usually in the form of MoUs between European institutions and countries in difficulty have required fiscal discipline and the reduction of budget deficits, including action on state debt levels. This led to what is widely perceived as a one-size-fits-all austerity recipe imposed on countries receiving assistance (Ireland, Portugal, Cyprus, Greece). The consequence of the implementation of these MoUs has been an uneasy mix with domestic legal provisions. In a number of cases, mandated measures have been judged unconstitutional, especially when they involved lay-offs, changes to labour laws and reductions in salaries, or increases in pension contributions. Claimants have sought to invalidate these decisions both in their implementation phase (in national courts) and at their origin (in European courts). Other claims are directed to the European Court of Human Rights in Strasbourg.
 
Many cases have been about violations of property rights. For example as a result of the Cypriot bailout, the islands two main banks  had to be restructured. The terms of the rescue required a bail-in of investors and depositors during the re-organisation. Those who saw part of their investment disappear have complained about deprivation of possession in national and European courts. In Greece too have expropriation type claims surfaced, mostly centered on losses incurred during Greece’s debt haircut, another instance of bailout mandated cuts. Claimants in this case have taken their arguments both to national courts and international investment tribunals.
 
The second question is who to complain about?
Here things get more problematic. The structure of Eurozone rescue programmes had European institutions negotiate with member states agreements, which were then signed and monitored by consortia involving, or led by, international institutions (like the IMF and the ESM). The problem with this arrangement is that while one can sue their government in national courts, European institutions in European Courts, and both in human rights courts, it is more difficult to challenge the actions of international institutions. A technical jurisdictional barrier therefore has served to shield the administrators of bailouts and MoUs from the bulk of claimants. This all however recently changed.
 
Something’s different
The European Court of Justice recently offered judgment on a case involving Cypriot claimants against European Union institutions for losses suffered due to the forced bank restructure mentioned earlier. Because actions related to the Cyprus bailout were handled by the ESM, so far there was an irremovable jurisdictional barrier to anyone who wanted to complain in a legal action about the involvement of the EU. The ECJ, for the first time however said that the tasks allocated to the Commission by the ESM Treaty oblige it to ensure that MoUs concluded by the ESM are consistent with EU law. The consequence is that the European Commission should refrain from signing MoUs whose consistency with EU law is in doubt. Suddenly the jurisdictional barrier disappeared.
 
Shall everyone run to the courts then?
Not quite yet. The court did not decide that the Cypriot MoU was illegal and ordered no compensation for Cypriot investors. The measures taken in Cyprus were judged as necessary and proportionate in the circumstances. Nonetheless, recent jurisprudence is significant as it breaks down the barrier between European institutions and international-treaty based structures that have sprang up to deal with the needs of euro-area crisis response. This opens the door to legal challenges to the bailout programmes of the EFSF/ESM offering an avenue to a plethora of claimants to unpick the questionable legal underpinnings of conditionality and austerity policies. There are a lot more claims challenging austerity and its consequences over and beyond property deprivation. Lawyers all over the European South are open for business.
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The City and Brexit: A Primer

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Chapter 1: Passporting

The prospect of Brexit has created a tsunami of information as people try to get to terms with the various consequences of a British exit from the European Union. As a teacher of Banking Law, I realised that while a lot of terms are commonly referenced in the financial press, our students – and the wider public- have little appreciation of what is happening and what the implications are.

I am starting therefore a series of short posts on issues Brexit-related from a non-technical perspective for a non-legal audience. You can view this as a primer on the relationship of the world of business with Brexit.

We start with the City and the perceived threat Brexit poses to Passporting. This post presents what Passporting is, why it is important and how Brexit is likely to affect the operation of financial firms & banks out of the UK and with what consequence. This piece is meant to be informative, not partisan, so I will make an effort to avoid repeating why I think Brexit is a very, very bad idea.

What are we talking about?

The City is worried that if the UK departs from the Single Market it will lose Passporting rights. A core consequence of Freedom of Movement for (financial) services is that authorisation granted to a banking business in one Member State will suffice for operations across the EU and it is not therefore required that the process be repeated in another. This principle – nowadays almost sacrosanct as a European principle of banking and financial law – is commonly referred to as ‘Passporting’. The notion of a ‘European passport’ is inexorably linked to the parallel concept of ‘passported activities’. Such activities are termed ‘activities subject to the mutual recognition’. The main reserved activities are, on the one hand, the acceptance of deposits or other repayable funds and, on the other, lending including, inter alia: consumer credit, mortgage credit, factoring, with or without recourse, financing of commercial transactions (including forfeiting). Also, it is important to note that this universal green light applies to the activities a financial institution wishes to perform in another Member State either by means of cross-border, distant services, or by means of a branch office in that other Member State.

Is this important?

The City is a key driver in the British economy. Britain has the highest ratio of services exports to GDP in the G7, at 13%. It also has the biggest share of financial services exports by some way, at 29% in 2012 (the US comes second at 15%). In 2014, financial and insurance services contributed £126.9 billion in gross value added (GVA) to the UK economy, 8.0% of the UK’s total GVA. London accounted for 50.5% of the total financial and insurance sector GVA in the UK in 2012. The sector’s contribution to UK jobs is around 3.4%. Trade in financial services also makes up a substantial proportion of the UK’s trade surplus in services. In 2013/14, the banking sector alone contributed £21.4 billion to UK tax receipts in corporation tax, income tax, national insurance and through the bank levy.

It is not perceived to be in anyone’s interests to sharply and artificially reduce the size of the financial sector in the short to medium term.

What can Brexit do?

Let us assume that Brexit does happen in one of its extreme versions, taking the country out of the Single Market. This will mean loss of Passporting rights, but it will not mean that the heady proportion of GDP contributed by financial services will disappear in its entirety. PwC estimates that the GVA of financial services to the economy will decline by 6-10% (roughly) by 2020, representing a reduction around £7-12 billion in value. Loss of employment is estimated between 70-100.000 in the financial services sector. Why is the projected impact so severe? One after all could point to banks operating successfully in countries outside the EU. An argument of the Leave camp is that reduced connection with Europe frees up options for increased trade in services (including financial services) beyond Europe.

The answer of why the impact is so severe is rather mundane. It is a matter of increased costs and upset balance sheets. No one is suggesting that banks headquartered in Britain will no longer be able to do business in Europe. The problem is that if the industry loses Passporting, compliance and administrative costs will increase markedly. Funds will need to move to the continent if accounts in Euros can no longer clear from London. While this does not mean that banks will close (after all, major banks already have a presence in the continent), it does suggest costs in the short and medium term. With the movement of funds, some (but not all) jobs will go. The cumulative impact of Brexit (especially if it also means exit from the Single Market) is that Britain will present a very different business proposition than it does now. This difference amounts to a few billion pounds wiped off the country’s GDP. This is not apocalyptic, but it is unavoidable if a hard-Brexit is the base scenario.

There is another aspect of Brexit impacts arising from a reduction to the size of the City. The Revenue will face a sharp loss of income if significant amounts of economic activity migrate to the continent. This, on top of increased budgetary needs due to a deteriorating economy (especially since the UK runs a budget deficit at around 6% at the moment) will be a bad hit to state finances.

Can other business, attracted from overseas, compensate? The answer to this question is yes, but only partly. The UK cannot, and should not, seek to become a big-island tax haven. It cannot jump from being the centre of European finance to Singapore-by-the-channel. Even if this were the aim, the price to pay for attracting international funds will be tax breaks and sharp tax cuts. This will not compensate for the loss of tax income, even if it helps firms retain a presence and preserves some part of the City.

Conclusion

Passporting is important and stepping out of a harmonised zone for the provision of financial services entails a loss of business which will not annihilate the sector, but will significantly reduce it. Any adjustment will take place over the longer term and in 2030, the City will still be smaller than it was in June 2016. Brexit, if it means exit from the Single Market, will not turn Canary Wharf into a parking lot, but it will not do any favours to the Treasury or growth in the British economy.

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