The EU’s chief Brexit negotiator has shown the first signs of backing away from his hardline, no compromise approach after admitting he wants a deal with Britain that will guarantee the other 27 member states will continue to have easy access to the City.
Michel Barnier wants a “special” relationship with the City of London after Britain has left the bloc, according to unpublished minutes seen by the Guardian that hint at unease about the costs of Brexit on continental Europe.
Barnier told a private meeting of MEPs this week that special work was needed to avoid financial instability, according to a European parliament summary of the session.
“Some very specific work has to be done in this area,” Barnier said, according to the minutes. “There will be a special/specific relationship. There will need to be work outside of the negotiation box … in order to avoid financial instability.”
The remarks hint at concern among senior Brussels policymakers about the damaging consequences of Brexit for the continent if Europe’s biggest financial centre is cut adrift.
A spokesman for the European commission insisted the minutes, which were drawn up by European parliament officials, did not “correctly reflect what Mr Barnier said”.
But the minutes do mirror the view of the governor of the Bank of England, Mark Carney. He told MPs on Tuesday “there are greater financial stability risks on the continent in the short term, for the transition, than there are for the UK”.
Carney said other EU nations relied heavily on the City for their financial needs and could face serious problems if international banks based in London were no longer able to gain easy access to European countries and corporations. “If you rely on a jurisdiction [the UK] for three-quarters of your hedging activities, three-quarters of your foreign exchange activity, half your lending and half your securities transactions, you should think very carefully about the transition from where you are today to where the new equilibrium will be,” he said.
The fear is that European governments and companies would find it harder and more expensive to raise capital if they were denied access to the City, which acts as Europe’s investment bank. Countries such as Italy, with very large national debt, are concerned that their economies would become even more fragile if financing costs rose.
The minutes indicate that Barnier repeated during Thursday’s meeting the well-worn mantra that the UK should not be allowed to cherry-pick the bits of the EU it likes. But his apparent concern about financial instability contrasts with bullish statements by EU leaders about swooping on London’s financial sector business.
UK to begin talks with New Zealand on post-Brexit trade deal
In the days after the EU referendum, French president FrançoisHollande said London should no longer be allowed to handle any transactions denominated in euros. These “euro clearing operations” are worth about $150tn a year. Some cities, including Paris and Frankfurt, have launched glossy marketing campaigns aimed at persuading bankers to leave the City of London.
Behind the scenes, EU officials are maintaining that the UK will be hardest hit by Brexit, but they are concerned about the costs facing continental Europe.
One senior source recently told the Guardian that closing London as a euro clearing centre was likely to increase costs for EU banks and companies. Another source has voiced concern that there would be limited gains for rival financial centres as a result of a smaller European single market.
On Friday, one the City’s most senior bankers welcomed growing recognition of the risk to the global financial system. “The industry and the regulatory community, and the political community, are fully aware of the importance of maintaining financial stability,” said Douglas Flint, chairman of HSBC, Europe’s largest bank.
“There are clearly negotiating positions that will evolve over the next several months and years but the importance of preserving the functionality of the markets that exist today … is seen by everybody,” he said, following similar warnings to the Treasury select committee.
Flint suggested a new special relationship with the City could be achieved with a treaty guaranteeing “mutual recognition” of regulations. City firms are able to do business across the EU by using a “passport”, which will disappear when the UK quits the EU.
Barnier, a former EU commissioner in charge of financial services who led the post-crisis crackdown on bankers’ bonuses, is well placed to understand the financial risks of Brexit.
According to TheCityUK, the lobby group representing the the City, London is Europe’s biggest financial centre: 75 EU banks have major branches in the capital, holding £1.2tn of assets, almost one fifth of all UK bank assets. Twice as many euros are traded in London than in the 19 countries of the single currency combined.
Carney is increasingly becoming embroiled in a war of words with his continental colleagues over who faces the biggest Brexit risks.
Earlier this week, Malta’s finance minister, Edward Scicluna, said that the UK would suffer greater damage, although the rest of the EU would also suffer.
Barnier, according to the minutes of the meeting with MEPs, described Brexit as a “unique and extraordinary negotiation” that had to result in a outcome that showed the best option was being an EU member. He stressed there would be “no aggressiveness, no revenge, no punishment” but also no naivety.
Both lines are consistent with his only public statement on Brexit, when he stressed the interests of the rest of the EU were his top priority.
The European parliament must give its consent to the final Brexit deal and Barnier, who briefly served as an MEP, promised to involve them throughout the process.
In a sign of ambivalence about a transition deal, he told MEPs it was not part of the remit of the EU exit talks and they were waiting to see what the UK would ask for. This is consistent with earlier remarks, when he said it was “difficult to imagine” a transition deal because the UK did not know where it was heading after Brexit.
He made clear that the UK would have to follow EU law if it wished to remain a member of the single market during the transition period. This reinforces comments by Malta’s prime minister, Joseph Muscat, who said this week that the European court of justice would be “dishing out judgements” to the UK during any transition period.
Some MEPs’ mistrust of the UK comes through in the minutes of Barnier’s meeting with the MEPs who chair the European parliament’s main committees, including foreign affairs, trade, single market and budget.
Elmar Brok, the German centre-right chair of the foreign affairs committee, reportedly voiced concern the UK would become “a Trojan horse of the US” – echoing fears that date back to the time of Charles de Gaulle.
Werner Langen, a German centre-right MEP who is leading the investigation into the Panama Papers, wants to ensure the UK accepts international rules to clamp down on tax avoidance. Some EU politicians are worried the UK will embark on “a race to the bottom”, by slashing corporate taxes, to compensate for Brexit.
Barnier, however, said he expected the UK to stick to existing commitments to enact more than three dozen laws to combat money laundering and tax avoidance.