Europe’s financial centre is splitting up. Dublin has gained a lot of new business from London’s exodus, becoming the top choice of firms seeking higher ground post-Brexit. Now Ireland must decide whether it wants to be a leader or a counterweight in Europe’s financial future.
With the departure of the UK as the financial industry’s primary voice, the EU will have a chance to redefine how it approaches its banking and capital markets .
Already, debates have begun about making the regulatory framework more centralised or enabling a more regionally diverse and competitive financial sector. Proponents of a homogenous approach argue that a level playing field requires common rules, otherwise EU markets will never reach the level of integration necessary to prosper on a global scale. But other countries, including Ireland, have made the case that member states continue to bear individual risks and need a corresponding amount of regulatory freedom.
Some challenges, like anti-money laundering, remain constant whether Brexit happens or not. Also, Europe cannot indefinitely sustain the current tension between regulators in the “home” countries of firms’ financial headquarters and the “host” countries where they do much of their business. “Muddle through” is a stopgap, not a plan of its own, and the EU-27 will need to confront its shortcomings in areas like deposit insurance, insolvency rules and cross-border banking, especially for those countries already inside the euro.
The EU will take a fresh look at its regulatory programme when it installs new leadership later this year. Ireland will find itself in the crosshairs. On the one hand, it must protect its own interests. On the other hand, firms like Bank of America and Barclays that have chosen Ireland as their new EU hub will expect help navigating the rulemaking for all of Europe, not just their operations on the Emerald Isle.
This creates a conundrum. For example, under a centralised regime, any country that is home to a big bank could also be on the hook for all of its rescue or resolution costs in an emergency. At the same time, forcing banks to fragment their books could result in unnecessary isolation for offices in one country from their siblings in another, raising the risk that a bank wouldn’t be able to ride out a wave of crisis contagion.
The interests of the Irish consumer face similar tradeoffs. Taxpayers should never again be asked to offer unlimited guarantees to the banking sector. Even so, the entire economy benefits when financial firms expand their Dublin presence. This gives the average household a stake in creating a sturdier European financial architecture overall rather than taking a strictly defensive stance. [...]
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