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Analysis
Gap between aspiration and reality over UK place in Europe

Gap between aspiration and reality over UK place in Europe

ECB must eventually assume oversight of euro transactions 

by John Stevens

Wed 25 Mar 2015

There has been elation in the City of London at the 4 March European Court of Justice decision in favour of the UK government in its case against the European Central Bank on the location of central counterparty clearing houses at the heart of the international financial system.

However, this lifting of a threat to the long-term viability of trading in euro-denominated instruments in London, and thus to the City’s position as Europe’s pre-eminent financial centre, may be temporary. Rather than working to secure a fairly predictable legal success, the British authorities might have been better advised to have let matters rest. For the ECB had no immediate plans to introduce binding new measures on clearing houses.

As its statement to the ECJ makes clear, the ECB cannot conceivably do otherwise than eventually assume full oversight of all CCPs in the currency system for which it is responsible. It alone is able ultimately to provide the scale of emergency liquidity necessary to avert systemic risk. The 'generous swap arrangements' and 'swift exchange of information' advocated by some British commentators as a way of providing liquidity in London at times of potential disruption are unllikely to be equal to the task. That is the view of influential international regulators, notably the Federal Reserve.

To clear up uncertainty on its powers over clearing houses, the ECB must surely seek to amend its statutes to acquire the necessary competence explicitly. This could bring political confrontation in Europe's economic and financial affairs council. Euro members as a bloc would have the required votes to approve such a step under the applicable qualified majority procedure, and they would be opposed by non-members, principally the UK.

The Conservative party, looking ahead to a possible referendum by 2017, hopes to renegotiate the terms of the UK's EU engagement so it can recommend to the electorate that Britain should remain in the union. The Conservatives wish the UK to remain permanently outside the euro bloc, and they have made a fundamental condition of the renegotiation that the City should have absolute protection from the consequences of this status. Yet this objective is at odds with the fundamental position that the single currency, as well as being pivotal to the overall European project, is a central part of the single market in financial services that the UK holds in such high regard. Rather than being narrowed by the clearing house legal action, the gap between aspiration and reality of Britain's place in Europe is getting dangerously wider.

John Stevens, a former member of the European Parliament, is a member of the supervisory board of THS fund management.

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