February for financial markets has seen most of 2020 gains reversed and consequently, courtesy of Coronavirus concerns, an introspective review of what monetary policy tools are left in the toolkit or the workshop and how these, along with fiscal policy, might get things moving again. Germany has already announced plans to suspend its debt brake to allow municipalities to spend. If this passes the Bundestag (2/3rds required in both houses) this might be a small step towards further stimulus in Europe with the ECB expected to possibly follow at some point. Lagarde has already welcomed the move. However, "Helicopter Money", akin to Hong Kong's EUR 14.25 billion "handout" budget plans to pay each permanent resident 18 years and over HKD 10,000 (i.e., ca. EUR 1,200) is however not (currently) on the table. Difficult decisions certain remain on the horizon in tackling not only the virus' transmission but its spillover in financial markets and the real economy given that global trade tensions led to pressure on supply chains but also spending.
Other difficult decisions remain on the negotiating table - no not Brexit... but the EU's budget summit that ended without agreement but in the stand-off between the "Frugal Four" (Denmark, Austria, Sweden and the Netherlands" who refuse a budget amount higher than 1% of EU's GDP – the original proposal stands at 1.074% or EUR 1.09 trillion. The UK was a net contributor to the EU's budget and its departure leaves a EUR 75 billion gap for the 2021-2027 budget framework.
Meanwhile, standoffs continued with positioning on both sides of the Channel as post-Brexit free trade agreement (FTA) talks set to start March 2nd before the April break. With the EU's negotiating guidelines approved and the (quite short remaining) timeline of 10 rounds of talks agreed, concern remains in Brussels and Frankfurt that the UK's views publically communicated over the course of various speeches from the Prime Minister along with a defiant lecture in Brussels by the UK's Chief Negotiator runs the risk of talking past one another. This could lead to clashes on quotas, standards and ultimately Northern Ireland, with the latter being an increasingly important domestic issue for a political deal south of the Border.
For financial services the three paragraphs in the guidelines to negotiating the EU's FTA aspires to "appropriately structured voluntary cooperation on regulatory and supervisory matters, including in international bodies" (point 45 of the guidelines). The EU has already shot back to Westminster and the City that it will "unilaterally" set the rules on access and equivalence and do so in its own interest (point 44 of the guidelines). This does not resonate with the UK's default position seeking dynamic alignment and flexibility in how level it maintains its alignment to the level playing field. Expect Britain versus the Bloc 2.0 with cliff-edge No Deal 2.0 back on the horizon if both sides cannot get comfortable with parallel evolution of rules in terms of their design and implementation with a much more confident and aggressive UK government, with parliamentary majority, compared to its predecessor.
Domestic political issues and stalemate also add an additional twist. Germany has been catapulted to the center amidst troubles in the CDU leading to possible political paralysis on big issues and a more inward looking focus that could run well beyond the election of a new party leader on April 25th until the 20th Bundestag elections, which expected to be held in September 2021. This is crucial given Germany will take over the Presidency of the Council of the EU from Croatia in June 2020 and in addition to EU reforms needing Germany's full political focus also comes at crunch time for Brexit FTA talks. Add to that the issues that the Franco-German relationship is currently more cordial (some speak of stasis) and needs further clearing to return back to being constructive as the motor of a fully functioning EU during a year of big changes and priorities. Hope however is on the horizon in terms of the implementation of the Aachen/Aix-la-Chapelle Treaty which, while signed January 2019 in Charlemagne's erstwhile capital, aims to facilitate greater parliamentary cooperation and joint projects of national institutions.
Other Franco-German troubles and impacts on financial regulatory reform are also on the horizon given that the French Banking Federation has succeeded in compelling France's Conseil d'État (the legal advisor to the executive branch and supreme court for administrative justice) to request a preliminary reference from the Court of Justice of the European Union (ECJ to most) on whether France's national resolution authority, the ACPR, correctly implemented the EBA's Guidelines on product oversight and governance arrangements for retail banking products. The use by the European Supervisory Authorities, the ECB-SSM and also national authorities of soft law instruments such as Guidelines (that read like rules) has long caused confusion and consternation from supervised institutions. This judicial review within the Banking Union marks a potential turning point if not at the very least an open door, regardless of the outcome, to testing this type of rulemaking including also non-EU institutions originated soft law instruments such as BCBS 239.
Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.