Why the EBA Should Move to Eastern Europe Post-Brexit xbri.org

Following the July deadline for applications, the European Council have revealed that eight cities -Luxembourg, Brussels, Dublin, Frankfurt, Paris, Prague, Vienna and Warsaw- have bid for the privilege of hosting the European Banking Authority (EBA) (1). It is Paris and Frankfurt that have naturally emerged as the forerunners in this contest. However to lavish these cities with further benefits will only play into the populist-Eurosceptic narrative that the EU is equivalent to Franco-German domination of the continent. If the European Union wants to achieve true political and economic unity, the European Banking Authority must move to Eastern Europe.


Why Relocate?


“As the United Kingdom has notified the European Council under Article 50 of the Treaty on  European Union of its intention to leave the Union, it is necessary to move the two United  Kingdom-based Agencies to other locations within the Union's territory.”(2) One of the two agencies referenced is the European Banking Authority (EBA) whose job it is “to maintain financial stability in the EU and to safeguard the integrity, efficiency and orderly functioning of the banking sector.”(3)  At a Keynote Speech for the Institute of International & European Affairs, the former Special Representative for the City of London to the EU, Jeremy Browne, argued that London will continue to be a financial hub:


“We encourage the EU side in any negotiations not to think of London as an advantage held by the people on the other side of the table. In other words, the EU shouldn’t measure its success in negotiations by the degree to which it succeeds in diminishing the city of London. And instead to try and encourage people to think of London as Europe’s global financial centre- Europe’s gateway to global market. And London can continue to be a great asset for European business after Britain has left the European Union.” (4) 


However, both major parties in Britain have made clear that freedom of movement must end, and they therefore cannot retain membership of the European Economic Area. The Financial Services and Markets Act (2000) that gifts London its financial ‘passporting’ rights is predicated upon membership of the EEA. Therefore, British-based banks will likely no longer be able to trade their financial services with the rest of the EU as they currently do, which would be detrimental as London has long been seen as the bridge between the US and European markets. While no financial institution will be forced to relocate after Britain leaves the EU, it would not make sense for them to remain if they cannot access European markets.


The recently-elected French President, Emmanuel Macron, has already sacrificed his approval ratings to undertake massive reforms to the French economy and labour laws. These include amalgamating the numerous regulatory committees into a single body, allowing employers to negotiate conditions with workers rather than forcing industry-wide agreements upon them and capping the damages that employment tribunals can award as compensation to dismissed workers. (5)  Macron has also cut the corporate tax rate from 33.3% to 25% (Britain’s corporate tax rate is currently 19%). It is true, of course, that traditionally France has had substantially tougher regulations and employment that favour workers over employers, but the unprecedented- and seemingly unstoppable- rate at which the current administration is changing this suggests they are keen for Paris to benefit from the Brexit fallout. Frankfurt, on the other hand, has already attracted increased investment from banking giants Mitsui, Nomura, Daiwa, Sumitomo, Deutsche Bank, Citigroup and Morgan Stanley, and Goldman Sachs. (6) 


Essentially, because of Brexit, the EBA will be exiting London, where it has been since its establishment in 2011. A new home will therefore be required for more than two hundred jobs, two external data centres, and over three hundred “events” including workshops, seminars, and public hearings that generate almost nine thousand hotel bookings per annum. And while the banks may not follow the European Banking Authority, its relocation could at least have the potential to prepare the ground for a new financial hub.


Warszawa, Poland


Considering the President of the European Council (and former Polish Prime Minister), Donald Tusk, has recently said that “there is a question mark over Poland's European future,” (7)  it seems odd to think of their application to host the European Banking Authority as a serious one. The ‘question mark’ refers to the unconstitutional legal reforms being pushed through the Polish Parliament by the ironically-named Prawo i Sprawiedliwość (PiS, or translated to ‘Law and Justice’). These reforms would see the Supreme Court judges become a political appointment.


So surely this question mark alone should rule Warsaw’s application null and void? It seems strange that a country themselves breaching the values of the EU (not to mention the laws of their own constitution) should host the institution responsible for investigating breaches of EU law by national authorities. Well, it is worth noting that the Poland’s President Andrzej Duda has vetoed the legislation which made it through both the National Assembly and the Senate. Arguably this was a result of threats from the European Union and, as net beneficiaries, Poland are rather susceptible to the influence of Brussels. Rather than taking a punitive approach, which is only fuelling resentment toward a perceived Brussels-centric Union, the EU ought to reward Poland. As well as improving relations between Poland and the EU, this might have the added benefit of turning Poland from a net recipient of EU funding, to a net contributor in the long-term.


Moreover, the transfer of Poland’s financial industry to the private sector was pivotal in Poland’s  post-soviet transition, and so Warsaw is familiar with the economic benefits that a strong banking sector can bring to a country. Unfortunately PiS’s policy of ‘repolonising’ the financial sector has seen state-owned PZU acquire a large share of Alior Bank (one of Poland’s most successful start-ups) and, more recently, UniCredit’s controlling stake in Bank Pekao (Poland’s second-largest bank) resulting in more than half of Polish banking assets being brought under state control. In an interview with the Financial Times, Mateusz Morawiecki, the finance and development minister, argued that “having the majority of the banking sector in Polish hands is very good news for the Polish economy, as we can better control credit policy.” (8)  In reality, it has had the effect of stifling competition and creating a monopoly. While the nationalisation of banks has found support among many on the left, it might present a problem for the EBA whose existence is predicated on the regulation of a private banking industry. In reality, the movement of the European Banking Authority to Poland’s capital may be an opportunity to counter the regressive social and economic policies of PiS.


Praha, Czech Republic


During the fourteenth century Golden Age of Bohemia, Prague flourished as the focal point of trade and banking between the Italians and Germans and, under King Charles IV, became an imperial city.(9)  Prague has, since 2004, already housed the European Global Navigation Satellite Systems Agency, which the Czech commissioner, Karel Dobeš, was keen to mention when speaking in support of his home country’s application. It shows the Czech Republic is capable of hosting large multinational organisations. It is now perhaps a less contentious applicant to host the European Banking Authority.


According to Eurostat, the unemployment rate in the Czech Republic stands at 2.9% (compared 7.7% across Europe). Although the Czech Republic has one of the lowest rates of unemployment, an OECD report published last year identified the country’s reliance on the manufacturing industry leaves them most at risk from automation. (10)  This means the Czech government must look to restructure their economy in the long-term, and would benefit far more from hosting the EBA than its competitors.


One of the key inhibiting factors is level of education in the Czech Republic. Although over 90% of the population gain a secondary education qualification, only about 19% proceed university (although this is significantly lower compared to the OECD average of a third, it has almost doubled since 2000). In part this can be attributed to the strong performance of manufacturing jobs that become available post-secondary school, however the disparity between the earnings of those with secondary and tertiary qualifications is quite stark. (11) If the Czech Republic intends to refocus its economy for the financial sector, it must improve the educational attainment of its population. The short-term boost that would come from the increased revenue of economy taxes and consumption of service industries that the EBA would bring could be used to invest in national educational and innovation strategies. This would enable the Czech Republic to transition from a low-wage, assembly-line economy into a more sustainable model. Without such a transition, it is likely that as automation in the manufacturing industries continues, the state of the Czech economy will deteriorate and, in doing so, become increasingly more reliant on European Union funding.


Conclusion


While financial institutions have no obligation to relocate to whichever city hosts the EBA, where the European Council decide to situate the EBA is a strong indication of the future direction of European banking policy- this is especially true at time when the EBA is tasked with the development of the European Single Rulebook in banking which will essentially harmonise prudential rules for all financial institutions operating within the EU.   (12) Following the multitude of crises experienced by European banks in recent years, perhaps being in a capital city of a country that only embraced capitalism after the end of the Cold War may infuse the current EBA culture with a different perspective.


Of course, a seamless transition- everything from offices to educational facilities and amenities for the families of EBA staff are expected to already be in place- is emphasised by the European Council. The fact that Poland are starting to question whether an independent judiciary (a core feature of the form of liberal constitutional democracy the EU promotes) is really something they want, would make relocating the EBA to Warsaw a sizeable challenge to say the least. Although Prague does not seem to have the same problems, if the EU did want a well-established democracy with very little to worry about, then there is no question that Paris or Frankfurt should be chosen.


However, neglecting the Eastern member-states will entrench and widen regional socioeconomic differences and lead to a variable-geometry Europe. This is not the “Those Who Want More Do More” scenario outlined in the White Paper on the Future of Europe because, quite clearly, Prague and Warsaw want to do more. This is a conscious decision by the economically dominant countries in the European Union to horde the emerging benefits. Brexit offers the European Union a unique opportunity to re-think the way it does business in many ways, but if the members chose to prioritise the needs of the banking sector by opting for a safe option, like Paris or Frankfurt, it may later emerge as a wasted opportunity to bring development and investment in Eastern Europe, and its EU citizens, in line with the Western half of the continent. Europe no longer lives in the age of the European Coal and Steel Community- we have a European Union and, if this union is to be strengthened, long-term socioeconomic investment is needed to redress the East-West disparities. The short-term boost of housing the EBA in Prague or Warsaw is a stepping stone.

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1.http://www.consilium.europa.eu/en/policies/relocation-uk-based-agencies/eba/

2. Procedure leading up to a decision on the relocation of the European Medicines Agency and the European Banking Authority in the context of the UK's withdrawal from the Union, 22/06/2017

3. Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC

4. “Jeremy Browne - Brexit – a view from the City of London”. IIEA1. July 20, 2017. Youtube. Retrieved from: https://www.youtube.com/watch?v=vGJSdx7Pd9E

5. “French parliament approves Macron's labour reforms”. France 24. August 3, 2017.

http://www.france24.com/en/20170803-french-parliament-approves-macrons-labour-reforms

 6. Arnold, M., Martin, K., Noonan, L. “Citigroup and Deutsche Bank give Frankfurt a Brexit boost”. Financial Times July 20, 2017. https://www.ft.com/content/1b38eb1a-6d55-11e7-b9c7-15af748b60d0:  

While some are using Deutsche Bank’s decision to sign a 25-year lease in London to suggest the German bank are not intending to relocate, outlets reporting this fail to mention investments made by the bank to secure office space in Frankfurt. Chief Executive John Cryan has reportedly said: "We want to get to a position where London and Frankfurt can be used interchangeably."

7. “EU's Tusk says Poland's European future uncertain”.  Reuters. August 3, 2017. https://www.reuters.com/article/us-poland-politics-tusk-idUSKBN1AJ2TO

8. Rohac, D. “Poland’s rush to banking sector socialism”. FInancial Times. June 30, 2017. ”https://www.ft.com/content/f7283548-5cd1-11e7-b553-e2df1b0c3220

9. Roberts, J. M. A History of Europe. London: Helicon Publishing Ltd. (1996). p. 214

10. Arntz, M., T. Gregory and U. Zierahn  (2016), "The Risk of Automation for Jobs in OECD Countries: A Comparative Analysis", OECD Social, Employment and Migration Working Papers, No. 189, OECD Publishing, Paris. http://dx.doi.org/10.1787/1815199X

11. “Czech Republic”. Education at a Glance 2014: OECD Indicators.

12. Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC